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ELEMENTARY  ECONOMICS 


WITH  SPECIAL  REFERENCE  TO  SOCIAL 

AND  BUSINESS  CONDITIONS  IN 

THE  UNITED  STATES 


BY 


CHARLES   MANFRED   THOMPSON,   Ph.D. 

ASSOCIATE    PROFESSOR    OF    ECONOMICS 
UNIVERSITY   OF   ILLINOIS 


}  >  J  »  .  » 


BENJ.    H.    SANBORN   &   CO. 

CHICAGO  NEW  YORK  BOSTON 

1920 


^-^ 


<>^->p 


Hcon.   Dept.   Hcon.   TA.   Main  Libraif 

Copyright,  1919,      ^j 
By  BENJ.  H.  SANBORN  &  CO. 


•   e   ••  •  •        • 


TO   THE    GREAT    ARMY   OP    HIGH    SCHOOL   PUPILS 

WHO    ENTER    INDUSTRY    EVERY   YEAR 

THIS   BOOK    IS   RESPECTFULLY 

DEDICATED 


417904 


PREFACE 

Recent  events  have  brought  the  people  of  the  United  States 
face  to  face  with  numerous  new  economic  problems,  many  of 
which  are  likely  to  remain  unsolved  for  years  to  come ;  besides, 
they  have  compHcated  to  a  marked  degree  those  old  problems 
which  were  pressing  for  solution  at  the  outbreak  of  the  Great 
War.  In  consequence,  our  leaders  are  becoming  more  and 
more  convinced  that  increased  attention  should  be  given  in  our 
secondary  schools  to  a  serious  consideration  of  the  fundamental 
principles  on  which  these  problems  rest. 

Such  a  conviction  is  a  new  one  in  many  quarters,  for  hitherto 
the  notion  has  very  generally  prevailed,  especially  among  uni- 
versity teachers,  that  no  formal  study  of  the  Principles  of 
Economics  should  be  undertaken  before  the  sophomore  year  in 
college.  Obviously  such  a  notion  carries  the  implication,  un- 
conscious perhaps,  that  the  fundamentals  of  Economics,  even  in 
their  simplest  forms,  should  be  withheld  from  the  great  mass 
of  young  men  and  women  engaged  in  industry,  and  restricted 
to  the  select  few  who  are  able  by  one  means  or  another  to  be- 
come college  students.  Such  a  notion  not  only  carries  vicious 
impUcation,  but  it  also  is  ill  founded;  for  hundreds  of  high 
schools  the  country  over  prove  by  experience  that  their  pupils  are 
fully  capable  of  grasping  the  elements  of  economic  science  when 
presented  concretely  and  in  a  way  to  show  their  relationship  to 
practical  affairs. 

The  pubUc  high  school  is  now  the  "finishing  school"  of  the 
typical  leader  of  American  life,  and  it  is  likely  to  continue  to 
perform  that  function  for  another  generation  at  least ;  and  just 
so  long  as  this  condition  prevails  our  high  schools  cannot,  if  they 

V  - 


VI  PREFACE 

would,  escape  the  responsibility  of  presenting  squarely  and  as 
fully  as  possible  the  elementary  principles  that  govern  our  every- 
day business  actions. 

Since  the  great  bulk  of  the  leaders  of  to-morrow  can  have  no 
other  academic  training  in  economic  principles  than  that  gained 
in  the  pubhc  high  school,  it  is  highly  essential  that  the  text- 
book placed  in  their  hands  should  be  something  more  than  an 
introduction  to  a  college  course  to  be  pursued  two  or  three  years 
hence.  It  should,  with  due  regard  for  the  capacities  of  high 
school  pupils,  endeavor  to  introduce  its  readers  to  the  princi- 
ples that  underlie  business  and  determine  in  large  measure  the 
practices  of  the  business  world. 

In  preparing  this  text  I  have  had  four  ideals  in  mind:  to 
choose  for  discussion  only  those  topics  which  are  fundamentally 
important ;  to  push  the  discussion  of  laws  and  principles  to  a 
point  where  every  serious-minded  high  school  pupil  would  feel 
a  real  mental  challenge;  to  illustrate  every  law  and  principle 
by  references  to  historical  events  and  to  everyday  experiences, 
and  by  the  use  of  graphic  material ;  and  finally,  to  show  the 
relation  of  each  law  and  principle  to  the  industrial  activities 
in  which  practically  every  high  school  boy  and  many  of  our 
girls  must  engage. 

In  keeping  the  viewpoint  of  the  high  school  I  have  had  the 
assistance  of  teachers  in  secondary  schools  of  various  types  in 
all  sections  of  the  country ;  and  for  their  kind  and  disinterested 
cooperation  I  take  pleasure  in  expressing  my  sincere  appre- 
ciation. I  am  under  special  obligation  to  one  of  my  col- 
leagues. Dr.  M.  H.  Hunter,  who  has  read  and  criticized  the 
entire  manuscript,  and  rendered  invaluable  aid  in  preparing 
the  Exercises  and  Problems  that  accompany  each  chapter. 

Charles  Manfred  Thompson 

Urbana,  Illinois 
June  1,  1919 


TABLE   OF  CONTENTS 

PART  I.     INTRODUCTION  — ECONOMICS  AS  A  SOCIAL 
SCIENCE 

CHAPTER  PAQB 

I.  The  Social  Viewpoint 

1.  The  Social  Sciences 3 

2.  The  Individual  and  Society 6 

3.  Wealth  and  Welfare 9 

Exercises  and  Problems 12 

Supplementary  Reading  .         .         .         .        .    #    .  '     15 

II.  Nature  and  Content  of  Economics 

,             4.    Nature  of  Economics 16 

5.    Divisions  of  Economics 19 

Exercises  and  Problems 24 

Supplementary  Reading 26 


PART  II.  CONSUMPTION  OF  ECONOMIC  GOODS 

III.  Nature  of  Consumption 

^  6.   Motives  behind  Economic  Activity  ....      29 

7.  Nature  of  Demand .      32 

8.  Elasticity  of  Demand 34 

Exercises  and  Problems  .         .         .         .         .         .38 

Supplementary  Reading 39 

IV.  Laws  of  Consumption 

9.  Human  Wants  Are  Unlimited         .         .         .         .         .40 

10.  The  Law  of  Diminishing  UtiUty 44 

11.  The  Law  of  Marginal  Utility  .         .         .         .         .46 

Exercises  and  Problems  ......       52 

Supplementary  Reading 63 

vii 


Vlll 


TABLE   OF  CONTENTS 


V.  Dbmaj^d,  Supply,  and  Price 

12.  Relation  of  Demand  and  Supply  to  Price 

13.  Determination  of  Market  Price     . 

14.  The  Competitive  Market  Price     . 
Exercises  and  Problems 
Supplementary  Reading 


VI.  Some  Practical  Aspects  of  Consumption 

15.  Harmful  Consumption 

16.  Unwise  Consumption    . 

17.  Conservation  and  Thrift 

18.  Substitution 
Exercises  and  Problems 
Supplementary  Reading 


54 
56 
69 
64 
66 


67 
69 

72 
78 
79 
81 


PART  III.     PROBLEMS  OF  PRODUCTION 

VII.  Organization  of  Industry 

19.   Historical  Background 


20. 
21. 


The  Single  Enterpriser  and  the  Partnership 
The  Corporate  Form  of  Organization    . 
Exercises  and  Problems 
Supplementary  Reading 


85 
88 
90 
95 
96 


VIII.  Division  of  Labor  and  Large-Scale  Production 

22.  The  Factors  of  Production    .... 

23.  Division  of  Labor  ..... 

24.  Territorial  Division  of  Labor 

25.  Large-Scale  Production  .... 
Exercises  and  Problems  .... 
Supplementary  Reading        .... 


97 
100 
106 
108 
111 
113 


IX.  Land  (Natural  Resources) 

26.  Land  as  a  Productive  Factor 

27.  Natural  Resources  of  the  United  States 

28.  The  Law  of  Diminishing  Returns 
Exercises  and  Problems         .         •    >     • 
Supplementary  Reading        .         ,         . 


114 
118 
122 
128 
129 


CHAPTBB 

X. 


TABLE  OF  CONTENTS 

IX 

VL  AS  A  Factor  in  Production  ^ 

PAGE 

Source  of  Capital 

.     130 

Nature  of  Capitalistic  Production 

.     132 

Different  Kinds  of  Capital 

.     134 

Exercises  and  Problems       .... 

.     138 

Supplementary  Reading      .         .         . 

.     140 

29. 
30. 
31. 


XI.  Competition  versus  Monopoly 

32.  Impetus  of  Competition 141 

33.  The  Law  of  Monopoly  Price 145 

34.  Limitations  on  Monopolists 147 

Exercises  and  Problems 151 

Supplementary  Reading      .         .         .         .         .         .153 

'^ 

XII.  Transportation 

35.  Stages  in  the  Development  of  Transportation  in  the 

United  States 154 

36.  Railroad  Competition          .         .         .         .         .         .  158 

37.  Rate-Making 161 

38.  Government  Regulation  of  Railroads           .         .         .  162 

Exercises  and  Problems 166 

Supplementary  Reading 168 


XIII.  Marketing  the  Products  of  Industry 

39.  Separation  of  Producers  and  Consumers 

40.  Indirect  Methods  of  Marketing 

41.  More  Direct  Methods  of  Marketing    . 
Exercises  and  Problems 
Supplementary  Reading 


169 
170 
176 
179 

182 


XIV.  Government  and  Production 

42.  Patents,  Copyrights,  and  Trade-marks        .         .         .  183 

43.  Regulation  of  Industrial  Monopolies   ....  186 

44.  Regulation  of  Pubhc  Utilities 190 

45.  Fixing  Prices 192 

Exercises  and  Problems 193 

Supplementary  Reading 195 


TABLE   OF  CONTENTS 


PART  IV.    THE  EXCHANGE  OF  ECONOMIC   GOODS 

CHAPTER  PAGE 

XV.  Use  op  Money  in  Making  Exchanges 

46.  Characteristics  of  a  Good  Money      ....  199 

47.  Uses  of  Money 202 

48.  Kinds  of  Government  Money 205 

Exercises  and  Problems 210 

Supplementary  Reading 212 

XVI.  Monetary  Laws  Illustrated  From  the  History  of 
THE  United  States 

49.  Some  Important  Monetary  Laws       .         .         .         .213 

50.  Monetary  History  of  the  United  States     .         .         .  216 

Exercises  and  Problems 224 

Supplementary  Reading 223 

XVII.  Banking  and  Its  History 

51.  Development  of  the  Principle  of  Banking          .         .  227 

52.  Different  Kinds  of  Banks 229 

53.  A  Bank  Statement '     .         .231 

54.  Banking  in  the  United  States 233 

Exercises  and  Problems 238 

Supplementary  Reading    .         .         .         .         .         .  240 

XVIII.  Domestic  and  Foreign  Commerce   . 

55.  Nature  and  Volume  of  the  Trade  of  the  United 

States 241 

56.  Paying  Trade  Debts 243 

57.^  The  Balance  of  Trade 247 

Exercises  and  Problems 2^3 

Supplementary  Reading 255 

XIX.  The  Tariff  in  the  United  States 

58.  Historical  Sketch 253 

59.  Basis  of  Free  Trade 262 

60.  Economic  Arguments  for  Protection          .         .         .  263 

61.  Protection  and  Nationalism 264 

Exercises  and  Problems     ......  265 

Supplementary  Reading    .         .         .         .        *.         .  238 


TABLE  OP  CONTENTS  xi 

CHAPTER                                                                                                                                   -^^_,„^  PAGE 

XX.  Fluctuations  of  the  Price  Level       ^'^ 

62.  Effects  of  Fluctuating  Prices 269 

63.  Measurements  of  Price  Fluctuations        .         .         .  272 

64.  Price  Level  and  Industry 274 

Exercises  and  Problems 277 

Supplementary  Reading 279 


PART  V.     DISTRIBUTION   OF  THE  SOCIAL  INCOME 


XXI.  Distribution  of  Wealth  in  the  United  States 

65.  Differences  in  Wealth  and  Income   ....  283 

66.  Some  Social  Problems  Arising  from  Distribution     .  287 

67.  Proposed  Solutions 291 

'Exercises  and  Problems 292 

Supplementary  Reading 294 

XXII.  Return  to  Labor  (Wages)    '^'^ 

68.  Noncompeting  Groups  of  Workers  ....  295 

69.  Efficiency  and  Wages       .         .         .         .         .         .303 

70.  Methods  of  Wage  Payment     .         .         .         .    ^     .  306 

Exercises  and  Problems 308 

Supplementary  Reading 310 


XXIII.  The  Labor  Problem 

71.  Rise  of  Organized  Labor  .         .         .         .         .311 

72.  Aims  and  Methods  of  Organized  Labor  .         .         .     313 

73.  Methods  of  Settling  Labor  Disputes        .        .        .319 

74.  Labor  Legislation     .         .         .         .         .         .         .321 

75.  Foreign  Immigration        ......     323 

Exercises  and  Problems 326 

Supplementary  Reading 329 


XXIV.  Return  to  Land  (Rent) 

76.  Nature  and  Source  of  Agricultural  Rent .         .         .  330 

77.  Urban  Rents 334 

78.  Economic  Rent  and  Price 338 

Exercises  and  Problems 341 

Supplementary  Reading 344 


Xll 


TABLE   OP  CONTENTS 


CHAPTER 

XXV.  Return  to  Capital  (Interest) 

79.   Interest  Peculiar  to  Modern  Industry- 
Why  Interest  is  Paid  and  How  Much 
Variations  in  the  Interest  Rate 
Exercises  and  Problems   . 
Supplementary  Reading  . 


80. 
81. 


XXVI.  Return  to  the  Business  Man  (Competitive  Profits) 

82.  Place  of  the  Business  Man  in  Industry 

83.  The  Nature  and  Source  of  Profits    . 

84.  Cooperation  and  Profits 
Exercises  and  Problems   . 
Supplementary  Reading  . 


XXVII.  Socialism 


85.  Nature  and  Purposes  of  Socialism 

86.  Criticisms  of  the  Sociahstic  Program 

87.  Some  Substitutions  for  Socialism 
Exercises  and  Problems   . 
Supplementary  Reading  . 


U^ 


345 
346 
351 
353 
355 


356 
359 
363 
366 
368 


369 
374 
377 
379 
381 


XXVIII.  Social  Insurance 

88.  The  Risks  of  Industry 382 

89.  Kinds  of  Social  Insurance  :  Europe          .         .         .  386 

90.  Progress  and  Outlook  of  Social  Insurance  in  the 

United  States 389 

Exercises  and  Problems 393 

Supplementary  Reading 396 

XXIX.  The    Share    of    the    Government    in    Distribution  ^^ 
(Taxation) 

91.  Government  Revenues  and  Government  Expendi- 

tures    .'...• 397 

92.  Bases  of  Taxation    .         .         .         .         .         .         .401 

93.  Kinds  of  Taxes         .         .         .     *    .         .         .         .404 

Exercises  and  Problems  .         .         .         .         .         .  407 

Supplementary  Reading 410 

Classified  Course  of  Reading     . 411 

Index 415 


PART   I 

INTRODUCTION 
ECONOMICS  AS  A  SOCIAL  SCIENCE 


ELEMENTARY  ECONOMICS 

CHAPTER  I 

THE    SOCIAL   VIEWPOINT 

1.   The  Social  Sciences 

Nature  and  content  of  the  social  sciences.  —  The  subjects 
of  study  that  deal  with  the  various  phases  of  human  activity, 
as  expressed  in  social  groups,  are  known  as  the  social  sciences. 
Those  which  we  may  profitably  notice  in  this  connection  are 
history,  ethics,  government,  law,  sociology,  and  economics. 

History  brings  to  us  from  the  past  the  record  of  social  achieve- 
ment, which,  if  properly  interpreted,  serves  as  a  guide  for 
present  action  and  assists  to  forecast  the  future.  History 
is  not  merely,  as  an  eminent  English  historian  once  wrote,  past 
politics ;  it  is  a 'great  deal  more.  It  is,  so  to  speak,  the  founda- 
tion on  which  all  the  other  social  sciences  are  built,  since  a 
complete  understanding  of  any  one  of  them  depends  on  a 
correct   knowledge    of   past   events   and   past   developments. 

Ethics  is  concerned  with  the  human  duties  of  mankind ;  with 
the  application  of  the  golden  rule  to  human  relations.  Every 
day  we  hear  professional  men  speak  of  the  ethics  of  their  respec- 
tive professions.  A  physician,  for  example,  is  guided  in  his 
professional  acts  by  an  elaborate  code  of  medical  ethics.  Like- 
wise the  lawyer,  the  surgeon,  the  dentist,  and  the  teacher,  each 
has  the  ethical  standards  of  his  group  to  follow  and  to  maintain. 

A  third  social  science  is  government,  or  political  science,  known 
in  the  high  school  as  civics.     This  science  deals  with  the  govem- 

3 


4  "  '    'EtfiMTNTAkY  ECONOMICS 

ment  of  social  groups  as  expressed  in  constitutions  and  in  the 
administration  of  laws,  and  with  numerous  other  social  aspects, 
as  political  conventions,  primaries,  and  elections.  Closely- 
akin  to  political  science  is  law,  which  concerns  itself  primarily 
with  laying  down  definite  rules  to  govern  individuals  in  their 
relations  with  each  other  and  with  the  state. 

Another  social  science  is  sociology,  which,  in  its  narrow 
sense,  deals  with  the  distinctively  social  relations  among  in- 
dividuals. Consequently,  the  chief  concern  of  sociologists  is 
with  the  social  welfare  of  the  people.  To  that  end  they  en- 
gage not  only  in  a  study  of  the  causes  that  produce  inequalities, 
but  also  in  an  attempt  to  better  social  conditions.  Theirs  is 
a  very  practical  work  which  leads  them  into  the  homes,  as  well  as 
into  the  social  centers  now  to  be  found  in  all  large  cities.  It 
is  well  to  notice  in  passing,  however,  that  some  authorities  use 
the  term ''  sociology'^  in  a  broader  sense  to  include  all  the  social 
sciences. 

Still  another  social  science  is  economics.  Unlike  those  al- 
ready mentioned,  this  science  deals  largely  with  the  material 
aspects  of  life.  It  tries  in  a  scientific  spirit  to  explain  the  activi- 
ties of  mankind  in  securing  a  living;  to  study  man  as  a  wealth- 
getter  and  a  wealth-user;  to  account  for  the  motives  and  forces 
that  constantly  appear  in  the  business  relations  of  the  world. 
Because  of  the  materialistic  viewpoint  which  economics  must 
necessarily  take,  many  writers  and  teachers  consider  it  to  be  a 
mean  science,  ''  dismal,"  selfish,  and  even  sordid.  They 
forget,  however,  that  the  average  man,  irrespective  of  his 
occupation  or  station  in  life,  must  produce  goods  as  well  as  con- 
sume them ;  that  he  cannot,  if  he  would,  avoid  intimate  business 
contact  with  his  fellow  men  and  with  his  surroundings ;  and 
that  his  opportunity  to  enjoy  the  higher  things  of  life  must 
follow  after,  and  wait  on,  the  satisfaction  of  his  more  material- 
istic needs. 


THE   SOCIAL  VIEWPOINT  5 

Close  interrelation  of  the  social  sciences.  —  We  have  spoken 
of  the  social  sciences  as  if  they  were  independent  and  distinct 
one  from  the  other.  Such,  however,  is  not  the  case,  for  they  are 
merely  different  aspects  of  the  same  science,  each  regarding 
society  from  its  own  particular  viewpoint.  Yet,  since  the 
human  mind  cannot  grasp  the  social  field  as  a  unit,  it  has  been 
found  desirable  to  treat  them  as  distinct  sciences.  In  other 
words,  we  deal  with  the  various  social  sciences  as  independent 
subjects  of  study  for  the  sake  of  convenience  and  a  clearer 
understanding.  Consequently,  in  our  colleges  and  universities, 
where  ample  opportunity  is  given  for  research  and  speciahzation, 
they  have  been  developed  independently  under  the  direction 
and  guidance  of  highly  trained  specialists.  We  must  remember, 
however,  that  in  spite  of  this  development  the  study  of  society 
and  social  relationships  is  in  itself  a  complete  and  single 
science. 

Numerous  examples  of  this  close  relationship  are  to  be  found 
on  every  hand.  Foreign  immigration,  to  illustrate,  commands 
the  attention  of  the  historian,  the  political  scientist,  the 
sociologist,  and  the  economist.  The  historian  accounts  for 
the  events  and  developments  that  have  caused  millions  of  men, 
women,  and  children  to  migrate  from  their  old  homes  in  Europe 
to  America.  The  political  scientist  is  chiefly  concerned  with 
the  immigrant's  knowledge  of  the  forms  and  purposes  of  govern- 
ment, with  his  attitude  toward  American  democracy,  and  with 
his  influence  on  American  politics.  The  sociologist  studies  the 
more  distinctly  social  questions  connected  with  immigration, 
such  as  housing  conditions,  standards  of  living,  morals,  educa- 
tion, and  entertainment.  Lastly,  the  economist  approaches 
the  subject  from  the  standpoint  of  industry,  concerning  himself 
with  the  effect  of  immigration  on  such  things  as  js^igeSj^pra- 
duction  of  wealtli,_andJoreign  trade.  Each  specializes  on  a 
small  portion  of  the  subject  —  too  often  as  if  it  were  the  whole 


6  ELEMENTARY   ECONOMICS 

subject  —  but  it  requires  the  combined  labors  of  all  to  produce 
a  complete  and  accurate  account. 

Some  subjects,  such  as  the  Constitution  of  the  United  States, 
or  negro  slavery,  for  example,  belong  so  exclusively  to  one  or 
another  social  science  as  to  make  it  appear  that  treatment  under 
any  other  one  is  impossible.  Obviously,  the  political  scientist 
has  the  chief  interest  in  the  former,  while  the  historian  claims  the 
latter.  Nevertheless  the  economist  must  not  neglect  either^ 
Without  a  proper  understanding  of  the  Constitution  he  could 
not  account  clearly  for  the  various  economic  developments 
in  such  fields  as  labor  legislation,  interstate  commerce,  the 
protective  tariff,  money  and  banking;  and  no  description  of 
negro  slavery  can  ever  be  complete  which  fails  to  take  in 
consideration  the  economic  environment  in  which  it  developed, 
its  profitableness  and  unprofitableness,  or  its  effect  on  the  free 
labor  with  which  it  competed. 

2.   The  Individual  and  Society 

The  individual  viewpoint  of  industry.  —  The  normal  in- 
dividual very  naturally  regards  all  industry  from  his  own  narrow 
point  of  view.  He  is  inclined  to  feel  that  his  business  is  the  hub 
of  industrial  activity,  that  it  is  essential  to  the  welfare  of  society, 
and  that  it  even  deserves  encouragement  at  the  hands  of  the 
government;  and  this  feeling  he  often  has  regardless  of  the 
best  interests  of  society.  A  short  wheat  crop  with  high  prices 
may  bring  joy  to  the  wheat  farmer,  though  it  may  bring  distress 
to  multitudes  of  consumers.  Likewise,  the  glaziers  in  the  neigh- 
borhood of  numerous  greenhouses  may  welcome  a  severe  hail- 
storm as  a  blessing,  when  obviously  it  is  detrimental  to  society 
as  a  whole.  Even  those  whose  special  duty  it  is  to  regard  in- 
dustry from  the  social  point  of  view  often  fall  into  the  same  error. 
Every  winter  metropolitan  newspapers  view  heavy  falls  of  snow 
as  godsends  to  the  unemployed  men  of  the  cities,  who,  as  a 


THE   SOCIAL  VIEWPOINT  7 

result,  are  able  to  find  work  cleaning  streets  and  sidewalks. 
Such  erroneous  notions  arise  from  the  practices  of  modern 
society,  in  which  each  individual  produces  not  for  his  own 
direct  consumption,  but  for  the  markets.  It  would  be  different 
if  each  supplied  his  own  wants  directly  by  his  own  labor. 
The  wheat  farmer  would  view  a  short  crop  with  alarm ;  the 
glazier  would  see  no  blessing  in  a  hailstorm  that  compelled 
him  to  repair  his  own  greenhouse ;  nor  would  the  residents  of 
any  city  regard  a  heavy  snowfall  as  a  godsend  if  each  man  were 
compelled  to  shovel  the  snow  from  his  own  doorway. 

Social  viewpoint  of  industry.  —  While  it  must  be  admitted 
that  the  individualistic,  or  selfish,  viewpoint  of  industry  is  the 
force  that  drives  men  to  seek  improved  methods,  we  must  not 
lose  sight  of  the  fact  that  the  welfare  of  society  is  more  important 
than  that  of  any  individual  or  group  of  individuals ;  and  that  no 
individual  claim  for  preferment  can  stand  as  an  obstacle  in  the 
way  of  social  betterment.  This  broader  viewpoint,  the  view- 
point of  society,  has  made  steady  headway  during  the  past 
generation.  Not  many  years  ago  industrial  leaders  took  the 
ground  that  it  was  none  of  society's  affair  how  they  conducted 
their  own  business.  Now  they  think  and  act  differently  —  they 
recognize  their  responsibilities  to  society.  Recently  one  of 
America's  best  known  captains  of  industry  made  the  public 
statement  that  in  the  operation  of  his  business  and  in  the  use 
of  his  wealth,  he  considered,  not  alone  his  own  desires  and  needs, 
but  also  the  desires  and  needs  of  society.  The  same  spirit  has 
permeated  other  industrial  groups.  Professional  men,  farmers, 
small  business  men,  labor  organizations,  and  even  unorganized 
labor  are  catching  the  spirit  that,  while  American  democracy 
stands  back  of  every  individual  in  his  efforts  to  be  successful 
and  happy,  his  success  and  happiness  must  not  be  acquired  at 
the  expense  of  the  success  and  happiness  of  society  at  large. 

Because  of  these  different  viewpoints  the  economist  and  the 


8  ELEMENTARY  ECONOMICS 

business  man  are  inclined  to  disagree,  and  too  often  they  have 
a  mutual  disregard  for  each  other's  opinions.  The  economist  is 
likely  to  regard  the  business  man  as  selfish  and  self-centered, 
while  the  business  man  looks  on  the  economist  as  a  dreamer, 
and  on  his  plans  as  visionary  and  impracticable.  Both  are 
right  and  both  are  wrong.  The  business  man  as  such,  if  he  is  to 
succeed  in  a  large  measure,  must  conduct  his  business  as  if  it 
were  all-important,  while  the  economist,  on  his  pai-t,  must 
include  society  as  a  whole  in  his  field  of  investigation,  and 
formulate  principles  regardless  of  individual  desires  and  pur- 
poses. 

Industry  and  free  public  education.  —  The  interest  of  society 
in  private  industry  is  one  of  the  chief  reasons  for  the  estabhsh- 
ment  and  maintenance  of  free  public  education.  Clearly, 
children  as  well  as  their  parents  have  the  correct  notion  that 
school  attendance  increases  the  chances  for  higher  individual 
incomes  in  after  life.  Almost  all  college  students,  and,  it  is 
safe  to  say,  a  majority  of  high  school  pupils,  particularly  boys, 
frankly  admit,  when  questioned  on  the  subject,  that  they 
attend  school  primarily  to  prepare  themselves  for  better-paying 
places  in  the  industrial  world  than  they  otherwise  could  expect 
to  get.  They  are  encouraged  to  take  this  view  by  educators 
and  teachers  who  dwell  on  the  fact  that  each  day  a  boy  spends 
in  high  school  or  college  adds  ten  dollars  or  more  to  his  income 
in  after  life.  The  desire  to  increase  one's  earning  power  is 
laudable  enough,  but  may  we  not  properly  ask:  Can  the 
expenditure  of  public  money  be  justified,  from  an  economic 
point  of  view,  on  the  ground  that  it  will  assist  individuals  to 
increase  their  own  incomes?  The  answer  involves  the  two 
aspects  of  industry  —  individual  and  social.  Society  appeals 
directly  to  the  narrow  motives  of  the  individual,  we  may  say  — 
not  improperly  —  to  his  selfishness.  It  gives  him,  at  public 
expense,  the  opportunity  to  prepare  himself  to  earn  more  than 


THE  SOCIAL  VIEWPOINT  9 

would  otherwise  be  possible,  knowing  full  well  that  in  the  long 
run  he  will  normally  return  to  society,  through  increased 
production,  not  only  the  cost  of  his  training  and  education,  but 
also  something  in  addition. 

An  efficient  industrial  society.  —  In  spending  enormous 
sums  on  public  education,  society  has  in  mind  an  improved 
citizenship  from  the  standpoint  not  only  of  culture  and  govern- 
ment, but  also  of  industrial  efficiency.  At  one  time  education 
stood  almost  exclusively  for  a  higher  appreciation  of  hterature 
and  art.  Later  it  stressed  the  need  of  a  better  and  a  clearer 
understanding  of  the  working  of  the  government.  Now  society 
demands  that  the  possessor  of  an  education,  in  addition  to  being 
cultured  and  versed  in  the  science  of  government,  shall  be 
industrially  efficient.  To  that  end  coromercial  courses,  commer- 
cial high  schools,  technical  schools,  and  technical  colleges  in 
the  universities  have  been  established.  Also  the  courses  in  the 
so-called  literary  schools  and  colleges  have  been  changed  to  meet 
the  new  demand.  There  is  nothing  alarming  in  this  educational 
tendency.  It  merely  means  that  the  next  generation  will  value 
not  less  highly  the  cultural  development  and  the  stir  of  civic 
duty  that  comes  fpom  study  in  schools  and  colleges,  but  rather 
that  it  will  also  appreciate  the  need  of  an  increased  industrial 
efficiency  and  prepare  itself  through  education  and  training  to 
meet  that  need. 

3.   Wealth  and  Welfare 

Free  goods  and  economic  goods.  —  The  word  "  good  "  has 
two  slightly  different  meanings.  When  a  business  man  speaks 
of  goods  he  means  commodities,  such  as  hay,  wheat,  clothing, 
and  furniture.  The  student  of  economics  gives  the  same  word  a 
broader  meaning.  He  includes  not  only  commodities,  but  also 
personal  services  rendered  by  domestic  servants  and  others. 
No  serious   confusion,  however,   is  likely  to  arise  from  this 


10  ELEMENTARY  ECONOMICS 

difference  of  meaning,  for  the  laws  and  principles  applying  to 
commodities  very  generally  apply  to  personal  services. 

It  is  much  more  important  to  distinguish  between  free  goods 
and  economic  goods.  A  free  good  is  a  gift  of  nature,  supplied 
without  labor  and  without  limit.  Economic  goods,  on  the 
other  hand,  are  characterized  by  their  scarcity  as  compared  to 
the  demand  for  them.  The  best  examples  of  free  goods  are  air 
and  sunlight,  though  in  exceptional  cases  these  may  become 
economic  goods.  Water  in  a  brook  or  spring  may  also  be 
considered  as  free,  despite  the  fact  that  some  effort  is  always 
necessary  to  secure  and  utilize  it.  Free  goods  are  extremely 
important  in  the  life  of  human  beings,  yet  the  chief  attention  of 
students  of  economics  must  be  directed  toward  economic  goods. 

Nature  of  wealth.  —  In  discussing  wealth  two  important 
facts  must  be  kept  constantly  in  mind.  First,  the  wealth  of 
an  individual  may  or  may  not  be  wealth  in  a  social  sense. 
Second,  an  increase  in  wealth  may,  owing  to  increased  prices, 
be  accompanied  by  a  decrease  in  the  world's  supply  of  commod- 
ities. On  first  thought  most  of  us  would  say  that  the  wealth  of 
any  society  is  composed  of  the  total  wealth  of  its  individual 
members.  Such,  however,  is  not  the  case.  •The  execution  of  a 
real  estate  mortgage,  while  it  places  in  the  hands  of  the  owner 
evidence  of  wealth  from  which  he  may  derive  an  income,  has 
not  added  a  single  item  to  the  wealth  of  society.  It  shows 
merely  that  one  party  has  temporarily  given  up  his  command 
over  a  portion  of  social  wealth,  which  in  most  cases  of  this  kind  is 
money.  Some  forms  of  individual  wealth  may  even  represent  a 
positive  decrease  in  social  wealth.  Such  are  government  bonds 
sold  to  carry  on  war.  Clearly,  then,  it  is  a  mistake  to  attempt 
to  estimate  the  total  wealth  of  any  large  social  group  by  adding 
the  wealth  of  its  individual  members. 

Nor  does  an  increase  in  social  wealth  necessarily  indicate 
that  there  has  been  an  increase  in  the  number  or  amount  of  com- 


THE   SOCIAL  VIEWPOINT  U 

modities  possessed  by  this  same  society.  Here  again  we  are 
likely  to  be  misled  by  our  first  thoughts  on  the  subject.  An 
over-abundance  of  wheat,  for  example,  though  it  should  make 
bread  cheap  and  plentiful,  might  well  cause  the  total  value 
of  the  wheat  to  be  less  than  would  be  the  case  if  but  one-half 
or  one-third  of  the  amount  had  been  raised.  Conversely,  a 
shortage  in  wheat  might  well  raise  the  value  of  the  total  crop, 
also  the  value  of  the  land  on  which  it  is  produced,  far  above  the 
values  based  on  normal  yields.  In  any  case,  there  is  no  exact 
relation  between  the  wealth  of  a  social  group  and  its  stock  of 
commodities;  and  for  that  reason  we  should  not  be  hasty  in 
concluding  that  a  wealthy  community  or  country  is  necessarily 
prosperous. 

Wealth  and  natural  resources.  —  Obviously,  the  foregoing 
discussion  leads  to  the  conclusion  that  wealth  and  welfare  are  not 
necessarily  identical  terms.  Any  social  group  that  is  com- 
pelled, for  example,  to  consume  great  quantities  of  coal  for 
heating  purposes  must  of  necessity  be  wealthier  than  a  similar 
group  more  favored  by  nature,  if  the  two  groups  are  to  share 
equally  in  the  satisfaction  of  wants.  A  New  England  mechanic 
must  necessarily  be  wealthier  than  his  Florida  brother  if  during 
the  year  the  two  are  to  have  exactly  the  same  wants  supplied, 
for  he  must  consume  wealth  in  the  form  of  fuel,  warm  clothing, 
and  .heat-producing  foods,  to  enjoy  exactly  the  same  comforts 
which  nature  in  warm  climates  furnishes  freely  and  without 
limit.  The  same  principle  is  involved  in  comparisons  of  the 
North  and  the  South  just  prior  to  the  beginning  of  the  Civil 
War.  The  value  of  the^  northern  hay  crop  occupies  a  large 
place  in  these  comparisons,  but  scarcely  ever  does  one  find  any 
mention  of  the  value  of  the  year-round  grazing  lands  of  the 
South.  The  mere  fact  that  the  North  cured  more  than  a  hun- 
dred million  dollars'  worth  of  hay  each  year  is  ample  evidence 
of  the  presence  of  wealth  in  that  section,  but  it  does  not  prove 


12  ELEMENTARY  ECONOMICS 

that  its  welfare  was  increased  over  what  it  would  have  been 
had  the  climate  permitted  the  stock  to  graze  in  the  fields  during 
the  winter  months.  An  abundance  of  natural  gifts  ordinarily 
produces  prosperity  and  a  relatively  high  degree  of  human  wel- 
fare, which  may  or  may  not  be  accompanied  by  great  wealth, 
either  social  or  individual.  Consequently,  in  judging  the.  well- 
being  of  a  large  social  group,  such  as  a  state  or  a  section  of  the 
United  States,  a  mere  knowledge  of  the  wealth  of  that  section 
or  state  is  not  sufficient.  We  must  first  know  something  of 
the  gifts  of  nature  which  it  enjoys. 

Wealth  and  its  distribution.  —  We  must  also  remember  that 
a  large  social  group,  as  such,  may  be  relatively  wealthy  and  even 
enjoy  a  high  degree  of  total  welfare  and  still  have  among  its 
members  many  who  suffer  from  a  lack  of  the  common  necessaries 
of  life.  This  situation  we  often  meet  in  large  cities,  where  along- 
side lavish  displays  of  wealth  we  find  multitudes  of  under- 
nourished creatures  dragging  out  a  miserable  existence  in  dirty, 
crowded  tenement  houses.  On  the  one  extreme  is  abundance  ; 
on  the  other,  poverty  and  want.  This  inequality  offers  the 
hardest  social  problem  we  are  called  on  to  solve.  It  engages 
the  attention  of  serious  thinking  people  everjrwhere,  for  it 
seems  to  contradict  the  prevalent  notion  that  progress  in  the 
industrial  arts  has  been  accompanied  by  an  increase  in  the 
welfare  of  all  classes  of  society,      y 

EXERCISES  AND  PROBLEMS 
A 

1.  Why  should  history  be  called  a  social  science? 

2.  What  is  the  essential  difference  between  political  science  and 
law  ? 

3.  What  is  meant  by  the  expression  "legal  ethics"  ? 

4.  Under  which  social  science  should  a  study  of  charity  be  made  ? 
Why? 


THE  SOCIAL  Viewpoint  13 

5.  What  is  the  interest  of  the  historian,  the  political  scientist, 
the  sociologist,  and  the  economist  in  the  following  social  subjects  : 

a.  Farm  tenancy? 

6.  Presidential  elections? 

c.  Corruption  in  city  poUtics  ? 

d.  Expansion  of  foreign  commerce? 

e.  The  Great  War? 

/.    Railroad  development? 
g.  The  post  office? 

6.  What  is  meant  by  the  expression  "individual  viewpoint"? 

7.  How  can  the  expenditure  of  public  money  for  river  or  harbor 
improvements  be  justified  ? 

8.  Why  does  society  bear  a  portion  of  the  expense  of  public  educa- 
tion? 

9.  How  does  education  increase  industrial  efficiency? 

10.  Can  an  individual  be  industrially  efficient  and  at  the  same 
time  be  cultured?     Explain. 

11.  Just  how,  if  at  all,  does  training  for  industrial  efficiency  lessen 
the  desire  and  ability  of  an  individual  to  be  a  good  citizen? 

12.  Define  "wealth." 

13.  Explain  the  effect  of  prices  on  wealth. 

14.  What  is  the  difference  between  wealth  and  welfare  ? 

15.  Why,  since  nature  is  so  bounteous  in  the  tropics,  are  the  people 
of  Central  America  relatively  poor  ? 

16.  Why  are  the  people  of  the  Arctic  regions  relatively  poor? 

B 

1.  Mention  three  or  four  public  improvements  in  your  community. 
What  interest  do  they  hold  for  you  as  a  student  of : 

a.  History?  c.   Sociology? 

b.  Political  science  (civics)  ?  d.  Economics  ? 

2.  Do   students   ever   have   individual   viewpoints   which   society 
would  not  sanction,  as  to  methods  of : 

a.  Earning  money?  c.   Spending  leisure  time ? 

h.  Securing  academic  credit?     d.  Using  school  equipment? 

3.  Enumerate  the  motives  that  cause  young  people  to  attend  high 
school  or  college. 

a.  Comment  on  these  motives. 
h.  Are  any  of  them  selfish? 


14  ELEMENTARY  ECONOMICS 

c.  Are  any  of  them  entirely  unselfish  ? 

d.  Would  society  wholly  condemn  any  of  them? 

4.  Air  and  sunlight  are  free  goods.     Name  others. 

5.  May  a  free  good  ever  become  an  economic  good  ?     Give  examples. 

6.  Name  five  articles  that  are  clearly  wealth ;  and  five  that  are  not 
wealth.     Which  of  the  following  are  wealth : 

a.  Salt  in  the  ocean?  /.    Egyptian  mummy? 

b.  Weeds?  g.  State  penitentiary? 

c.  English  sparrow?  h.  Burglar's  tools? 

d.  Submarine?  i.   Mississippi  River? 

e.  Rosebush?  j.   Climate? 


1.  What  are  the  characteristics  of  a  practical  man?  Explain  your 
answer  to  each  of  the  following : 

a.  Is  the  wealthiest  man  in  your  community  practical  ? 
h.  Do  you  know  of  any  practical  man  that  is  not  wealthy? 

c.  Is  the  governor  of  your  state  a  practical  man? 

d.  Is  Rockefeller  practical? 

e.  Were  Presidents  Washington  and  Lincoln  practical? 

2.  A  public  speaker  recently  declared  that  the  typical  American 
city  would  vote  to  have  its  alleys  paved  with  sterling  silver,  provided 
the  bill  was  paid  out  of  the  federal  treasury.     Comment. 

3.  The  opinion  is  generally  held  in  the  United  States  that  society 
ought  to  provide  free  public  education. 

a.  What  does  "free  public  education"  mean? 

6.  Are  free  textbooks  usually  provided  for  high  schools? 

c.  Who  pays  the  expense  of  students  in  state  normal  schools  and 

universities  ? 

d.  Why  do  state  universities  usually  charge  law  and  medical 

students  a  relatively  high  tuition? 

e.  Is  free  public  education  free  f 

4.  If  $1000  a  year  is  a  fair  wage  for  a  family  in  Florida,  what 
would  be  a  fair  wage  for  an  Iowa  family  that  spends  $100  a  year  for 
coal?  an  Eskimo  family  that  spends  $500  a  year  for  whale  oil  to  be 
used  for  heating  purposes? 


THE  SOCIAL  VIEWPOINT  15 

SUPPLEMENTARY   READING 

Bullock,  C.  J.,  Introduction  to  the  Study  of  Economics,  3d  ed.,  (Silver 

Burdett  &  Company,  publishers.  New  York,  1908),  pages  84,  87, 

129. 
Ely,  R.  T.,  Outlines  of  Economics,  3d  ed.,  (The  Macmillan  Company, 

publishers,^ew  York,  1916),  pages  105-108. 
Fetter,  F.  A.,  Economics,  (The  Century  Company,  publishers.  New 

York,  1915,  2  volumes).  Vol.  I,  pages  3-12. 
Fisher,  I.,  Elementary  Principles  of  Economics,.  (The  Macmillan  Com- 
pany, publishers,  New  York,  1913),  pages  4-13. 
Johnson,  A.  S.,  Introduction  to  Economics,  (D.  C.  Heath  &  Company, 

publishers.  New  York,  1909),  pages  1-19. 
Seager,  H.  R.,  Principles  of  Economics,   (Henry  Holt  &  Company, 

publishers.  New  York,  1913),  pages  50-60. 
Seligman,  E.  R.  a..  Principles  of  Economics,  5th  ed.,   (Longmans, 

Green  &  Company,  publishers,  New  York,  1912),  pages  8-20. 
Taussig,   F.  W.,   Principles  of  Economics,  2d  ed.,    (The  Macmillan 

Company,    publishers.    New   York,    1915,    2   volumes).    Vol.    I, 

pages  3-14. 

Note.  —  The  references  found  at  the  close  of  each  chapter  are  con- 
fined to  standard  college  texts  in  economics.  For  additional  references, 
see  the  classified  bibliography  at  the  end  of  volume,  pages  411-414. 


CHAPTER  II 
NATURE    AND    CONTENT    OF    ECONOMICS 

4.  Nature  of  Economics 

How  to  study  economics.  —  Before  taking  up  the  study  of 
any  new  subject  it  is  desirable,  in  order  to  avoid  wasting  time 
and  effort,  to  learn  something  about  the  best  methods  to  be 
employed  in  mastering  it.  Some  subjects,  like  botany  and 
physics,  are  best  approached  through  experiments  carried  on 
in  the  school  laboratories.  There  the  pupil  learns  through 
trial  and  observation  to  formulate  the  laws  and  principles 
underlying  his  science.  This  is  known  as  the  inductive  method 
of  study.  The  same  method,  as  we  shall  see  presently,  may- 
be applied  to  a  limited  extent  to  the  study  of  economics. 
More  important  in  our  work,  however,  is  the  deductive  method, 
which  requires  some  ability  to  reason  abstractly  —  that  is, 
independent  of  experiment  and  observation.  This  method  most 
people  find  difficult  to  master.  For  that  very  reason  pupils 
and  even  business  men  often  become  discouraged  and  give  up 
the  study  of  economics.  If,  however,  they  would  but  remember 
that  the  chief  aim  of  .our  science  is  not  to  discover  laws,  but 
rather  to  apply  them  to  business,  much  of  this  discouragement 
can  be  removed.  We  do  not  need,  for  example,  to  concern 
ourselves  with  the  proof  that  an  increase  in  the  amount  of 
money  in  circulation  tends  to  cause  prices  to  rise.  Instead,  we 
start  with  the  assumption  that  such  is  the  case  and  try  to  ex- 
plain the  rise  of  prices  at  some  particular  time  or  place.  In 
other  words,  the  student  of  economics  finds  it  necessary  to  go 

16 


NATURE  AND  CONTENT  OF  ECONOMICS     17 

from  the  general  to  the  particular,  while  the  student  of  a  labora- 
tory science  is  chiefly  concerned  in  studying  particular  phenom- 
ena from  which  he  draws  general  conclusions  known  as  laws 
and  principles. 

The  nature  of  an  economic  law.  —  Economics,  like  other 
sciences,  has  certain  important  laws  which  must  be  mastered 
as  we  progress  in  our  study.  It  is  desirable,  then,  at  the  out- 
set to  understand  as  accurately  as  possible  the  nature  of  an 
economic  law.  Scientific  laws  as  a  rule  merely  state  tendencies. 
We  learn  from  the  study  of  physics  that  a  metal  rod  shortens 
as  its  temperature  falls.  Suppose,  however,  that  the  two  ends 
of  such  a  rod  be  firmly  secured.  Obviously,  then,  a  lowering 
of  the  temperature  would  not  cause  the  rod  to  become  shorter. 
We  must  not  conclude,  however,  that  the  law  is  invalid,  for  it 
states  only  a  tendency  which  would  have  become  a  i-eality  had 
no  opposing  force  been  exerted  on  the  rod.  Similarly  in 
economics,  laws  hold  good  only  so  long  as  they  are  not  neu- 
tralized by  opposing  ones.  For  that  reason  it  is  best  to  qualify 
an  economic  law  with  the  expression  "  tends,"  or  ^'  other  things 
remaining  equal."  Thus,  to  illustrate,  we  should  not  say  that 
the  fall  in  price  of  a  particular  commodity  will  increase  the 
demand  for  that  commodity.  Ordinarily  such  a  statement 
would  be  correct,  but  not  always.  If  at  the  same  time  the 
prices  of  all  other  cdmmodities  should  fall  as  rapidly,  there  is  no 
reason  to  believe  that  there  would  be  any  increase  in  the 
demand.  It  would  be  more  correct,  therefore,  to  say  that  as 
the  price  of  a  jJarticular  commodity  falls,  the  demand  tends  to 
rise;  or,  as  the  price  of  a  particular  commodity  falls,  the 
demand,  other  things  remaining  equal,  will  rise. 

Economics  as  an  art.  —  Hitherto  we  have  spoken  of  economics 
as  a  science,  which  it  is ;  yet  like  all  other  sciences  it  has  an 
art  side,  which,  in  the  minds  of  many,  is  by  far  the  most  impor- 
tant.   The  physicist,  to  draw  another  illustration  from  the 


18  ELEMENTARY  ECONOMICS 

physical  sciences,  is  primarily  concerned  with  the  purely 
scientific  aspects  of  his  subject ;  but  his  labors  would  be  largely 
in  vain  if  he  or  some  one  else  did  not  apply  to  the  industrial 
arts  the  scientific  laws  and  principles  which  he  formulates  in 
the  laboratory.  Discovery  of  the  principle  of  air  pressure  is 
one  thing,  its  application  to  a  common  cistern  pump  is  another. 
One  is  science  ;  the  other,  art.  The  same  distinction  occurs  in 
economics.  One  of  the  best  known  economic  laws  is  that  the 
wants  of  any  individual  have  varying  degrees  of  intensity. 
Thus,  any  one  of  us  may,  at  a  given  moment,  desire  a  hat  more 
than  a  pair  of  shoes,  the  shoes  more  than  a  fountain  pen,  and 
the  pen  more  than  a  week-end  excursion  to  some  resort.  There 
is  no  assurance,  however,  that  we  shall  make  our  purchases  in 
the  order  named.  The  hatter,  the  shoe  merchant,  the  stationer, 
and  the  resort-owner,  each  presents  his  wares  in  the  most 
attractive  manner,  usually  by  displays  and  advertising,  in 
order  to  force  the  demand  for  his  particular  commodity  or 
service  to  the  fore  —  that  is,  to  make  the  want  for  it  more  in- 
tense than  it  otherwise  would  have  been.  It  may  easily  happen, 
then,  that  we  shall  forego  the  hat,  <  the  shoes,  and  the  pen  in 
order  to  be  able  to  enjoy  the  week-end  vacation.  The  law  of 
the  intensity  of  want,  and  its  application  to  business  in  the  form 
of  attractive  advertising,  though  intimately  connected,  are 
distinct  aspects  of  the  same  thing.  One  is  science,  the  other  is 
art. 

Material  for  the  study  of  economics.  —  The  most  important 
field  for  the  study  of  economics  is  not  found  in  books,  but  in  the 
business  world.  He  who  would  master  even  the  most  elemen- 
tary problems  of  economics  must  study  the  motives  and  actions 
of  men  as  they  go  about  the  everyday  tasks  of  making  a 
living.  To  do  this  successfully  requires  a  keen  power  of 
observation.  The  student  of  economics,  as  he  progresses  in 
his  thinking  on  economic  subjects,  will  observe  more  and  more 


NATURE  AND  CONTENT  OF  ECONOMICS     19 

what  had  formerly  escaped  his  notice.  The  botanist,  when  he 
goes  into  the  country,  naturally  observes  the  flowers  and  trees 
and  other  forms  of  plant  life ;  the  geologist  watches  for  imique 
rock  formations ;  while  the  student  of  economics  speculates  on 
the  fertility  of  the  soil,  the  distance  to  markets,  the  feasibility 
of  employing  labor-saving  machinery,  and  the  current  wages  of 
farm  help.  We  can  readily  see,  therefore,  that  the  field  from 
which  the  student  of  economics  draws  his  material  for  study  is 
wide  and  far-reaching.  Furthermore,  the  material  he  finds 
there  comprises  not  only  physical  objects  such  as  interest  both 
the  botanist  and  the  geologist,  but  also  human  nature  of  every 
description  and  even  the  souls  of  men.  Consequently,  judg- 
ments under  such  circumstances  are  difficult  to  form,  and  when 
formed  they  are  often  open  to  hostile  criticism. 

5.   Divisions  of  Economics 

Consumption.  —  The  most  fundamental  notion  in  economics 
is  consumption.  It  came  first  in  the  history  of  mankind,  and 
it  seems  Ukely  to  continue  to  the  end  of  time  as  the  chief  motive 
for  economic  activity.  Desire  to  consume  has  been  the  strong- 
est factor  in  the  development  of  modem  civiHzation.  It  is 
the  force  that  has  brought  the  human  race  step  by  step  from 
the  stone  age  to  its  present  civilization.  It  accounts  for  the 
migration  of  whole  nations,  for  the  conquest  of  continents, 
for  the  settlement  of  vast  agricultural  areas,  and  for  the  build- 
ing of  populous  cities.  No  other  human  desire,  we  may  safely 
say,  is  so  universal  or  so  persistent.  On  it  rest  not  only  pleasure 
and  enjojrment,  education  and  culture,  freedom  and  independ- 
ence, but  also  life  itself. 

Consumption  in  its  very  nature  is  destructive,  for  with  few 
exceptions  we  cannot  consume  without  destroying.  The  food 
we  eat  is  destroyed  at  once.  We  consume  our  clothing  more 
gradually.     Still  longer  does  it  ordinarily  take   to  consume 


20  ELEMENTARY  ECONOMICS 

an  automobile,  while  houses  often  last  a  lifetime.  In  any  case, 
consumption  takes  place,  even  though  no  immediate  effect  be 
discernible.  Curiously  enough,  refraining  from  consuming  a 
good  does  not  usually  preserve  it  intact,  for  time  itself  is  an 
insatiable  destroyer.  Thus,  two  elements  enter  into  the 
destruction  of  goods.  One  is  the  inability  to  consume  without 
destroying,  such  as  is  the  case  with  food  and  clothing;  the 
other,  the  ravages  of  time,  which  destroy  ruthlessly  our  food, 
our  clothing,  our  home,  and  even  the  pictures  on  the  wall. 

Production.  —  Following  consumption  comes  the  notion  of 
production.  Primitive  man  soon  found  that  nature  did  not 
supply  a  sufficient  amount  or  variety  of  goods  to  satisfy  his 
wants.  Then  and  only  then  did  he  turn  to  productive  labor. 
Gradually  his  wants  drove  him  to  extend  his  productive  opera- 
tions; Stone  utensils  and  tools  appeared.  Later  he  discovered 
how  to  make  bronze,  which  was  followed  by  iron  and  steel. 
Long,  however,  after  the  discovery  of  the  process  of  making 
iron  and  steel,  production  continued  to  be  characterized  by 
direct,  hand  methods.  Not  in  fact  until  well  after  the  middle 
of  the  eighteenth  century  did  machinery  play  an  important 
part  in  industry.  Marvelous  as  have  been  the  developments 
of  productive  processes,  important  as  they  are  in  the  history 
of  the  progress  of  mankind,  we  must  not  forget  that  they  have 
followed  closely  after  an  increased  desire  on  the  part  of  human 
beings  to  consume  goods. 

We  speak  in  a  general  way  of  the  production  and  consumption 
of  goods.  It  would  be  nearer  correct  to  speak  of  the  production 
and  consumption  of  the  utilities  embodied  in  goods.  It  is  a 
well-known  fact  that  man  cannot  create  matter.  We  may  go  a 
step  further  and  say  that  man^  cannot  create  goods.  He  can, 
however,  by  processes  of  rearrangement,  create  utilities,  which 
after  all  are  the  objects  of  human  desire.  These  we  may  call /orm 
utilities.     He  can,  for  example,  with  the  assistance  of  nature 


NATURE  AND  CONTENT  OF  ECONOMICS     21 

and  natural  laws,  change  raw  cotton  into  cloth,  thereby  creating 
the  various  utilities  embodied  in  the  finished  product.  Each 
step  in  the  process  tends  to  destroy  utiUties  as  well  as  to  create 
them.  Spinning  the  cotton  into  thread  destroys  any  utility 
the  cotton  may  have  had  as  a  material  for  stuffing  mattresses, 
but  it  creates  a  new  utility  in  the  form  of  sewing  material. 
Likewise,  the  weaving  of  the  thread  into  cloth  destroys  the 
utility  of  the  thread  for  sewing  purposes  and  creates  a  new 
utiUty  which  cloth  alone  possesses. 

All  the  processes  necessary  to  raise  the  cotton  and  then 
to  turn  it  into  cloth  are  productive.  Yet  additional  pro- 
cesses —  that  is,  the  further  creation  of  utilities  —  are  usually 
necessary  before  the  cloth  can  be  consumed.  No  one  would 
think  of  going  to  a  cotton  mill  for  the  purpose  of  getting  cloth 
for  personal  consumption.  Rather  he  depends  on  his  local 
merchant  to  get  it  for  him.  Nor  does  the  merchant  go  per- 
sonally to  the  factory  for  his  cotton  cloth.  He  gets  it  by  freight 
or  express  either  from  the  factory  direct  or  from  a  wholesale 
dry-goods  house.  Thus,  we  see  that  at  least  two  productive 
processes  stand  between  the  consumer  who  desires  to  utilize 
the  cloth,  and  the  weaver  who,  like  the  cotton  farmer,  has 
created  form -utilities.  The  railroad,  or  some  other  method  of 
transportation,  carries  it  to  the  retail  merchant,  thereby  creating 
place  utilities,  while  the  retail  merchant,  in  turn,  by  keeping  the 
cloth  until  it  is  needed  by  his  customers  creates  time  and  posses- 
sion utilities.  As,  our  modem  civiUzation  has  developed,  all  of 
these  workers,  and  often  a  great  many  more,  are  usually  neces- 
sary to  create  the  total  bundle  of  utilities  embodied  in  finished 
products  ready  for  consumption. 

Not  all  work,  however,  results  in  the  creation  of  utilities 
desired  by  man,  or  even  in  the  creation  of  any  utilities  at  all. 
One  might  exert  all  his  strength  in  an  effort  to  overturn  one -of 
the  pyramids  and  yet  produce  nothing.     Even  if  he  should  over- 


22  ELEMENTARY  ECONOMICS 

turn  it,  no  utilities  would  be  created  as  a  result.  He  would 
be  much  like  the  boy  whose  father  made  him  build  a  rail  fence 
and  then  tear  it  down  on  the  plea  that  the  work  would  keep  him 
out  of  mischief.  These  are  extreme  illustrations,  yet  on  every 
hand  men  labor  without  positive  results,  either  because  of 
ignorance  or  because  of  misdirected  energy.  We  may  conclude, 
then,  that  production  is  the  creation  of  utilities  by  labor  wisely 
and  efficiently  directed. 

Exchange.  —  Soon  after  primitive  man  began  to  produce 
he  found  himself  in  possession  of  a  surplus  of  goods  for  which 
he  had  no  immediate  need.  Naturally  he  sought  for  a  neighbor 
who  desired  to  possess  his  goods  and  who  in  turn  had  goods  of 
his  own  to  exchange.  Here  was  the  basis  for  an  exchange,  pro- 
vided each  desired  the  other's  goods  and  provided  further  that 
they  could  mutually  agree  as  to  exchange  value.  This  method 
of  exchange  is  known  as  barter,  and  in  newer  countries  it  per- 
sists to  the  present  day.  Barter,  however,  as  we  shall  presently 
see,  gradually  gave  way  to  buying  and  selling  in  the  terms  of 
those  few  commodities,  like  gold  and  silver,  which  practically 
everybody  desired  to  possess.  Then  the  phenomenon  of  price 
appeared.  Men  began  to  see  the  advantage  of  exchanging 
their  surplus  goods  for  go/d  or  silver,  which  soon  came  to  be 
known  as  money,  supplying  their  own  needs  by  purchases  with 
the  same  money.  Later  banks  arose  to  supply  credit  to  take 
the  place  of  money,  which,  with  the  paper  money  of  the  various 
governments,  has  finally  come  to  occupy  the  most  important 
place  in  exchange.  Accordingly,  under  exchange,  which  is  one 
of  the  four  large  groups  into  which  economics  is  divided,  we 
shall  study  the  various  functions  of  money;  the  principles 
underlying  the  science  of  banking,  together  with  the  banking 
history  of  the  United  States ;  domestic  and  foreign  commerce  ; 
the  tariff ;  and  causes  and  effects  of  price  fluctuation.  All  these 
subjects,  we  shall  see  when  we  take  up  the  detailed  study  of  ex- 


NATURE  AND  CONTENT  OF  ECONOMICS     23 

change,  are  closely  relati^d  aspects  of  the  same  thing  —  the 
exchange  of  goods. 

Distribution.  —  As  used  in  economics  the  term  "  distribution" 
means  apportioning  —  that  is,  the  division  of  the  entire  social 
income  among  those  who  produce  it.  Ordinarily,  we  are 
likely  to  think  of  distribution  in  the  sense  of  transportation,  of 
buying  and  selling,  of  marketing.  Distribution,  however,  is 
static,  not  dynamic.  It  concerns  itself  with  the  shares  that  go 
to  the  different  persons  and  groups  that  produce,  and  not  with 
the  methods  or  means  by  which  these  shares  are  handed  over. 

Strangely  enough,  distribution,  the  last  of  the  four  great 
economic  notions  to  develop,  has  become  the  most  important. 
A  century  ago,  and  even  less,  the  chief  economic  concern  of  the 
world  was  to  increase  the  output  of  production.  Men  who 
built  factories  and  employed  women  and  children  to  work  long 
hours  for  little  pay,  were  hailed  as  benefactors  of  mankind. 
Improvements  in  the  industrial  arts  have  changed  the  social 
viewpoint.  No  longer  is  it  feared  that  the  supply  of  goods  is 
likely  to  be  inadequate  to  normal  demands ;  or  that  improve- 
ments and  developments  in  productive  processes  will  lag  behind 
any  increase  in  population.  Rather  is  the  fear  expressed  by 
seriously  thinking  people  that  many  groups  of  those  who  assist 
to  produce  are  being  inadequately  rewarded  —  that  is,  that 
they  are  not  receivin-g  a  just  share  of  the  goods  they  produce. 
Consequently,  the  most  important  problem  in  economics,  the 
one  to  which  economists  now  give  the  greatest  consideration, 
is  concerned  with  the  distribution  of  the  social  income. 

Under  the  subject  of  distribution  we  shall  have  occasion  to 
examine  the  principles  governing  wages,  rent,  interest,  and 
profits ;  the  cause  and  purposes  of  socialism ;  the  place  of  social 
insurance  in  industry ;  and  the  share  of  the  product  that  goes 
to  the  government  in  the  form  of  taxation.  Some  of  these 
subjects,    notably   socialism,    might   well   be    studied    under 


24  ELEMENTARY  ECONOMICS 

production,  for,  as  we  shall  see,  the  chief  demand  in  the 
socialistic  program  is  the  government  ownership  of  the  instru- 
ments of  production.  Yet  the  whole  problem  of  social  unrest, 
as  manifested  by  the  socialists,  arises  from  the  feeling  that 
distribution,  as  it  now  exists,  is  wrong.  Also,  in  some  books  on 
elementary  economics  taxation  is  treated  as  a  fifth  division  of 
the  subject.  It  may  come,  however,  under  distribution,  for 
usually  taxes,  Hke  rent,  wages,  and  interest,  are  paid  directly  or 
indirectly  from  current  income. 

EXERCISES  AND   PROBLEMS 
A 

1.  Define  the  word  "laboratory." 

2.  Describe  briefly  a  laboratory  experiment. 

3.  What  did  this  experiment  teach? 

4.  Why  is  the  laboratory  method  called  the  inductive  method  ? 

5.  What  is  the  difference  between  the  science  and  the  art  of 
physics  ?  of  botany  ? 

6.  State  some  laws  that  are  never  mere  tendencies ;  some  that  may 
be  tendencies ;   and  some  that  are  always  tendencies. 

a.  What  is  always  the  shortest  distance  between  two  points? 

h.  How  does  pressure  on  a  gas  affect  its  volume? 

c.   Do  objects  always  move  toward  the  center  of  the  earth? 

7.  Why  is  consumption  said  to  be  fundamental? 

8.  What  is  the  relation  of  consumption  to  production? 

9.  What  is  the  difference  between  goods  and  utilities  ? 

10.  When  does   destruction  create   utilities?     When  does    it  not 
create  utilities? 

11.  How  does  a  locomotive  engineer  add  utilities  to  a  spool  of  thread  ? 

12.  What  is  the  distinction  between  productive  and  unproductive 
labor? 

13.  How  do  modern  methods  of  exchange  differ  from  primitive 
methods  ? 

14.  State  exactly  the  meaning  of  the  term  **  distribution, "  as  used 
in  economics. 

15.  Explain  the  difference  between  the  exchange  and  the  distribution 
of  goods. 


NATURE  AND  CONTENT  OF  ECONOMICS     25 

B 

1.  Would  you  use  inductive  or  deductive  reasoning  in  working  a 
problem  in  algebra  ?  in  building  a  gas  engine  ?  in  starting  a  gas  engine  ? 

2.  Cite  other  instances  where  you  have  used  inductive  reasoning; 
deductive  reasoning. 

3.  Name  five  unproductive  occupations. 

a.  Why  is  each  occupation  unproductive  ? 

6.  Were  any  of  these  occupations  ever  productive  ? 

c.   Are  any  of  them  likely  to  become  productive  ? 

4.  Why  has  money  exchange  very  generally  displaced  barter  ex- 
change ? 

a.  Name  any  articles  you  have  ever  bartered. 

h.  With  what  difficulties  did  you  meet? 

c.   How  would  money  have  obviated  these  difficulties? 

5.  Show  how  water  may  assume  the  various  kinds  of  utilities. 

6.  Write  three  economic  questions  about  a  horse;  three  about  a 
house ;  three  about  ail  automobile.  Write  about  each  of  these  three 
questions  which  are  not  economic. 

7.  Give  examples  of  unproductive  labor  that  is  not  criticized. 

8.  Mention  some  instances  in  which  time,  instead  of  destroying 
goods,  increases  their  value. 


1.  Adam  Smith  held  that  labor  to  be  productive  must  "realize 
itself"  in  some  "particular  subject  or  vendible  commodity." 

a.  How  would  Adam  Smith  have  classified  each  of  the  following : 
i.  Domestic  servant?  ♦  v.  Lawyer? 

ii.  Soldier?  vi.  Merchant? 

iii.  Policeman?  vii.  Opera  singer? 

iv.  Violinist?  viii.  Public  official? 

h.  How  would  you   classify  each   of   the   above   occupations? 

Why? 
c.   What  changes,  if  any,  have  occurred  since  the  time  of  Adam 
Smith  regarding  unproductive  labor? 

2.  During  the  summer  of  1918  a  ruling  of  the  War  Department, 
concerning  the  employment  of  men  of  draft  age,  raised  the  question  of 
productive  and  unproductive  labor. 

a.  Is  all  labor  productive  ?     Explain. 


26  ELEMENTARY  ECONOMICS 

h.  Is  all  productive  labor  essential? 

c.  Are  the  following  productive : 

i.  Farmers? 

ii.  Preachers? 
iii.  Teachers? 
iv.  Athletic  directors? 

V.  Professional  baseball  players? 

d.  Which,  if  any,  of  the  above  perform  essential  labor?     Why? 

3.  You  sell  a  $30  suit  to  an  old-clothes  man  for  $5.  Does  this 
indicate  that  your  wealth  has  been  diminished?  that  the  wealth  of 
society  has  been  diminished? 

4.  Distribution  has  long  since  become  the  most  important  notion 
in  economic  problems. 

a.  Who  share  in  distribution? 

6.  Which  group  feels  most  strongly  that  its  share  is  inadequate  ? 

Why? 
c.  What  is  the  basis  of  this  feeling? 

SUPPLEMENTARY   READING 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  3-15. 

Fetter,  Economics,  Vol.  I,  pages  3-10. 

Fisher,  Elementary  Principles  of  Economics,  pages  1-4. 

Seager,  Principles  of  Economics,  pages  1,  2. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  23-35. 


PART.  II 

THE  CONSUMPTION  OF  ECONOMIC  GOODS 


CHAPTER  III 
NATURE    OF   CONSUMPTION 

6.   Motives  behind  Economic  Activity 

Preservation  of  life.  —  Obviously,  the  most  fundamental 
motive  for  economic  activity  is  the  preservation  of  human  life ; 
yet  most  people,  we  may  assume,  have  never  experienced  any 
mental  or  physical  pain  owing  to  a  lack  of  food  to  sustain  mere 
existence  or  of  clothing  to  keep  them  fairly  comfortable.  In 
other  words,  the  typical  man,  though  he  may  worry  about  meet- 
ing bills,  and  often  wonder  just  how  he  is  going  to  be  able 
pecuniarily  to  do  this  or  that,  seldom,  if  ever,  seriously  con- 
siders the  probability  of  death  from  starvation  or  exposure.  If, 
however,  he  were  driven  to  this  extremity  he  would  fight  bitterly 
against  any  odds  to  secure  the  minimum  of  food,  clothing,  and 
shelter ;   for  not  to  do  so  would  inevitably  mean  death. 

Desire  for  comforts.  —  Fortunately  for  the  progress  of 
civilization  the  normal  individual  is  not  satisfied  with  a  bare 
existence.  He  desires  more  and  a  greater  variety  of  food  than 
will  merely  sustain  his  physical  strength  sufficient  to  permit 
him  to  go  about  his  daily  tasks.  He  might  b^  able  to  get  along 
and  even  thrive  on  the  coarse  fare  of  the  early  pioneer,  yet  he 
demands  something  more  in  the  way  of  delicacies,  fresh  vege- 
tables out  of  season,  or  ice  cream.  Also,  in  so  far  as  physical 
comfort  is  concerned,  a  rough  woolen  shirt,  a  pair  of  overalls, 
heavy  shoes,  and  a  shoddy  coat  would  suffice.  But  no  self- 
respecting  American  would  be  satisfied  with  such  an  outfit  com- 
prising his  whole  wardrobe.     Comfort  in  the  matter  of  clothing 

29 


30  ELEMENTARY  ECONOMICS 

means  more  than  protection  and  warmth.  It  means  some 
style  in  the  way  of  an  extra  suit  for  Sundays  and  hoUdays,  linen 
collars,  neckties,  and  other  accessories.  Likewise,  in  the  matter 
of  the  home  the  normal  individual  desires  more  than  one  or  two 
shabbily  furnished  rooms  with  none  of  the  comforts  in  the  way 
o£  rocking  chairs,  pictures,  musical  instruments,  or  attractive 
dishes.  Obviously,  he  could  exist,  and  even  live  to  an  old  age, 
as  his  early  ancestors  did,  without  any  of  these  comforts. 
Yet  he  refuses  to  do  so,  and  in  his  refusal  we  find  the  second 
chief  motive  for  his  economic  activity. 

What  has  been  said  leads  naturally  to  the  significant  question : 
What  are  comforts?  The  term  is  a  relative  one,  much  like 
such  terms  as  heat,  cold,  and  dark.  What  to  one  group  or  to  one 
individual  is  a  comfort  may  appear  to  another  as  a  luxury  or  to 
a  third  as  a  necessity.  For  most  people  a  fur-trimmed  overcoat 
is  a  luxury.  The  well-to-do  consider  it  a  comfort,  while  the 
very  rich  might  well  look  on  it  as  a  necessity.  We  may  say, 
roughly  speaking,  that  whether  or  not  a  social  group  or  an 
individual  considers  goods  needed  above  the  bare  line  of 
subsistence  to  be  necessities,  comforts,  or  luxuries,  depends  in  a 
large  part  on  habit  and  standard  of  living,  about  which  we 
shall  have  more  to  say  later. 

Desire  for  luxury  and  ostentation.  —  A  third  motive  for 
economic  activity  is  the  desire  to  consume  what  we  may  un- 
mistakably call  luxuries,  and  by  their  consumption  to  be 
recognized  as  superior  beings.  Evidences  of  such  a  desire  are 
to  be  found  on  every  hand.  Ultra-styHsh  clothing  made  from 
exclusive  patterns  by  custom  tailors,  luxurious  automobiles, 
diamonds,  and  fine  houses  bring  recognition,  though  their 
display  for  the  purpose  of  attracting  attention  may  be,  and 
usually  is,  vulgar.  Yet  the  desire  to  get  these  luxuries  to 
satisfy  an  unhealthy  appetite  for  the  extreme,  and  to  display 
them  for  the  purpose  of  gaining  social  distinction,  drives  men 


NATURE  OF  CONSUMPTION  31 

to  greater  economic  activities  than  they  otherwise  would  under- 
take ;  and  for  that  reason  we,  as  students  of  economic  questions, 
must  consider  them  seriously,  even  though  as  individuals  we 
may  look  on  them  with  indifference  or  even  with  contempt. 

The  desire  for  luxuries  and  ostentation  leads  to  many  curious 
results.  It  might  be  thought  on  the  first  impulse  that  only 
rich  people  have  these  desires.  Such,  however,  is  not  the 
case.  Fine  clothing  and  other  forms  of  ostentation  are  often 
not  safe  criteria  of  the  owner's  financial  standing.  Many  a 
rich  man  goes  more  poorly  dressed  than  one  of  his  lowest-salaried 
clerks,  while  his  home  may  be  less  elegant  than  that  of  his 
private  secretary.  Any  merchant  of  women's  ready-to-wear 
garments  will  testify  that  many  of  his  best  customers  for  high- 
priced  clothing  are  the  poorly-paid  clerks  of  the  variety  stores, 
telephone  operators,  and  cheap  office  assistants.  Sellers  of 
jewelry,  furniture,  and  men's  clothing,  and  the  managers  of  high- 
priced  places  of  amusement,  not  to  mention  a  great  many 
others  in  similar  lines  of  business,  corroborate  this  testimony. 
The  same  desire  leads  also  to  much  of  the  crime  with  which 
society  is  plagued.  Now  and  then  some  one  steals  a  loaf  of 
bread  or  a  cut  of  meat  to  keep  himself  or  his  family  from  starv- 
ing, or  falsifies  his  books  to  provide  the  simple  comforts  of  life. 
More  often,  we  may  safely  say,  the  cause  of  dishonesty  is  the 
desire  to  purchase  luxuries  with  which  to  make  a  display. 
As  it  is  with  theft,  so  it  is  with  most  other  forms  of  crime : 
the  desire  of  the  individual  to  enjoy  luxuries  and  ostentation 
overcomes  his  dread  of  the  punishment  he  can  expect  if  dis- 
covered. 

Desire  for  power.  —  Wealth  is  power.  It  gives  its  owner  an 
influence  which  he  otherwise  would  not  possess.  It  manifests 
itself  in  politics,  government,  industry,  education,  and  even  in 
religious  affairs.  The  owner  of  wealth,  other  things  being 
equal,  is  usually  preferred  over  his  neighbor.     He  receives  at 


32  ELEMENTARY  ECONOMICS 

the  hands  of  society  a  distinction  which  few  individuals  are 
able  to  forego.  Most  people  speak  in  more  or  less  awe  of  a 
Rockefeller,  a  Morgan,  or  a  Vanderbilt.  They  also  defer  to 
the  local  magnate.  They  take  pride  in  elevating  men  who  have 
succeeded  in  a  large  way  financially.  Consequently,  the  desire 
for  the  power,  which  wealth  brings,  drives  men,  usually  those 
who  already  have  large  financial  holdings,  to  exert  themselves 
to  accumulate  more  wealth.  Thus,  we  see  that  this  desire  is 
one  of  the  chief  motives  back  of  economic  activity. 

Of  the  four  motives  which  we  have  examined,  the  last,  the 
desire  for  power,  is  by  far  the  most  questionable ;  and  in  it  lie 
^rave  dangers  to  society.  No  one  can  seriously  question  the 
purity  of  the  motives  that  drive  men  to  conserve  their  lives  and 
to  get  the  comforts  that  make  life  worth  living.  Also  even  the 
most  serious-minded  can  afford  to  smile  indulgently  on  those 
who  crave  luxuries  and  ostentation.  Society  cannot,  however, 
look  with  indifference  on  the  power  that  can  be  gathered  into 
the  hands  of  a  few  through  the  accumulation  of  wealth.  Not  long 
ago  a  prominent  New  York  banker  contended  in  a  meeting  of 
economists  that  it  mattered  little  to  society  if  a  few  men  held 
practically  all  of  the  wealth  of  the  United  States.  The  basis 
of  his  contention  was  that  these  few  could  not  possibly  consume 
their  wealth,  and,  consequently,  that  it  would  eventually  find 
its  way  back  to  the  masses.  Clearly,  he  did  not  understand 
that  society  was  keenly  interested  in  the  power  and  influence 
which  the  wealth  itself  would  place  in  the  hands  of  these  few 
men. 

7.   Nature  of  Demand 

Demand  is  effective  desire.  —  The  word  "  demand  "  is  used  in 
our  everyday  speech  in  a  variety  of  ways,  but  in  economics  it 
has  a  particular  significance  which  we  shall  attach  to  it  here- 
after.    The  mere  desire  for  goods  does  not  lead  to  the  satis- 


NATURE  OF  CONSUMPTION  33 

faction  of  wants,  though  desire  is  the  first  step  in  that  direction. 
Practically  every  one,  we  may  safely  say,  desires  to  own  an 
automobile ;  yet  it  is  a  well-known  fact  that  only  a  small  per 
cent  of  the  people  of  the  United  States  enjoy  that  distinction. 
In  other  words,  to  change  slightly  a  well-known  expression, 
'*  If  desires  were  horses,  beggars  would  ride."  Obviously,  then, 
the  desire  for  a  good  may  or  may  not  result  in  the  acquisition 
of  that  good.  Something  more  is  needed.  The  desire  must 
be  made  effective;  and  when  a  desire  becomes  effective  we 
call  it  demand.     Thus,  we  can  define  demand  as  effective  desire. 

The  question  may  properly  be  asked  at  this  point :  When 
does  a  desire  become  effective  —  that  is,  when  does  a  desire 
become  a  demand  ?  A  complete  answer  to  the  question  will  be 
found  a  little  later  in  the  discussion  of  demand,  for  it  involves 
the  principle  underlying  price.  We  can,  however,  at  this  stage 
in  our  progress,  say  that  the  demand  for  a  good  emerges  when 
the  one  who  desires  to  possess  it  is  willing  and  able  to  produce 
the  good  directly  or  to  forego  the  use  of  some  other  good  or 
goods  which  he  may  exchange  for  it.  Suppose,  for  example, 
that  a  shipwrecked  man,  like  Robinson  Crusoe,  desires  some 
sort  of  protection  against  the  sun,  such  as  an  umbrella.  He 
might,  as  he  suffered  from  the  heat,  continue  to  desire  an  um- 
brella without  having  a  demand  for  it.  Suppose  again  that  he 
should  conceive  the  idea  of  constructing  one  from  materials  re- 
covered from  the  wreck  and  that  he  was  fully  aware  of  the  labor 
involved.  Even  then  there  would  be  no  demand.  If,  how- 
ever, he  actually  constructs  the  umbrella,  we  may  conclude 
that  his  desire  has  become  effective  —  that  is,  it  has  become 
a  demand. 

Relation  of  demand  and  price.  —  Much  more  common,  how- 
ever, are  the  cases  when  desire  becomes  demand  as  a  result  of 
the  willingness  of  the  one  having  the  desire  to  pay  the  current 
market  price  either  in  money  or  in  other  goods.     Suppose  a 


34  ELEMENTARY  ECONOMICS 

certain  individual  desires  to  own  an  automobile.  He  has  the 
money  in  the  bank  to  pay  for  it,  but  hesitates  to  buy  at  the 
price  named.  Clearly,  his  desire  in  this  case  is  nothing  more  than 
a  desire.  Certainly,  it  has  not  yet  become  a  demand,  for  demand 
would  mean  a  sale.  Suppose,  to  continue  the  illustration,  he 
decides  to  buy  the  automobile.  Then  his  desire  has  become  a 
demand. 

We  have  assumed  above  that  the  demand  for  the  automobile 
came  as  a  result  of  an  increase  in  the  intensity  of  desire.  It 
might,  however,  have  come  just  as  easily,  or  even  more  easily, 
from  a  lowering  of  the  price.  The  principle  of  reducing  prices 
to  change  desires  into  demands  is  significant  in  at  least  two 
respects.  First,  it  is  the  underlying  reason  for  price  reductions 
on  the  part  of  retail  merchants.  Second,  it  shows  that  demands 
ordinarily  increase  with  a  fall  in  price.  In  fact,  as  price  falls 
demand  and  desire  tend  to  bec6me  equal.  When  any  one  says, 
therefore,  there  is  little  or  no  demand  for  a  particular  good,  he 
means  a  demand  at  the  current  price.  Any  other  assumption 
would  be  incorrect,  for  a  proper  lowering  of  the  price  would 
ordinarily  create  a  demand  sufficient  to  take  the  entire  stock. 

8.   Elasticity  of  Demand 

Nature  of  an  elastic  demand.  —  All  demands  are  more  or 
less  elastic ;  that  is,  the  demand  for  any  particular  good  tends 
to  increase  as  its  price  falls.  In  the  case  of  some,  the  increase 
is  very  rapid,  of  others,  very  slow.  Somewhere  between  these 
two  extremes  is  an  indeterminate  boimdary  line  separating 
elastic  demand  from  inelastic  demand.  Elasticity  of  demand 
is,  therefore,  a  relative  term,  since  no  demand  is  absolutely 
elastic  or  absolutely  inelastic.  Generally  speaking,  the  demand 
for  luxuries  is  elastic,  for  each  slight  decline  in  price  tends  to 
cause  a  relatively  large  increase  in  demand.  Literally  thousands 
of  men  were  persuaded  a  few  years  ago  to  buy  a  certain  make 


NATURE   OF  CONSUMPTION 


35 


of  automobile  when  the  price  was  reduced  but  a  Uttle  more 
than  ten  per  cent.  Conversely,  a  general  increase  in  the  prices 
of  automobiles  caused  by  the  Great  War  had  an  immediate  effect 
in  curtailing  demand ;  though  in  this  particular  case  curtailment 
was  not  as  great  as  it  would  have  been  had  there  not  been  a 


y 
p' 


I 

\ 

w 

E 

\ 

s' 

S' 

\w' 

\^ 

\ 

^ — E' 

\ 

^/' 

V   V     M 


M' 


X 


Fig.  1. 


rise  in  the  prices  of  practically  all  other  goods.  Curve  EE'  in 
Fig.  1  serves  to  illustrate  the  character  of  an  elastic  demand. 
A  fall  in  price  from  OP'  to  OP  (that  is,  from  MS  to  M'S')  causes 
an  increase  in  the  demand  from  OM  to  OM'  (P'S  to  PS'). 

Inelastic  demand.  —  The  demand  for  necessaries  and  com- 
forts is  less  elastic  than  the  demand  for  luxuries.  A  shght 
decrease  in  the  prices  of  common  table  salt  or  matches,  for 
example,  would  be  unlikely  to  increase  appreciably  the  demand 
for  either  of  these  commodities.  Even  a  sharp  decrease  in 
price  would  cause  few  people  to  increase  their  consumption  of 
either,  simply  because  more  salt  in  the  food  or  more  matches 


36  ELEMENTARY  ECONOMICS 

on  the  shelf  are  not  desired.  Bread  also  has  an  inelastic  demand, 
but  to  a  less  extent  than  salt  or  matches.  So  also  have  the 
plainer  kinds  of  food,  the  more  common  articles  of  wear,  and 
all  the  other  goods  that  enter  into  everyday  consumption.  In 
Fig.  1,  curve  II'  represents  an  inelastic  demand.  It  will  be 
noticed  that  it  is  much  more  abrupt  than  the  more  gentle  elastic 
curve  EE'.  At  the  price  OP'  (VW)  we  assume  that  the  volume 
of  demand  is  OV  (P'W).  As  the  price  declines  the  increase  in 
demand  is  slight.  At  the  new  price  OP  (VW)  the  demand  is 
OV  (PWO,  which  is  slightly  more  (W)  than  it  was  at  the  old 
price. 

Elasticity  of  demand  and  price  fluctuation.  —  On  first  im- 
pulse one  might  think  that  price  fluctuation  would  be  greater 
under  an  elastic  than  under  an  inelastic  demand.  But  such  is 
not  the  case.  The  very  moment  the  price  of  a  good  with  an 
elastic  demand  starts  to  fall,  numerous  buyers  will  come  into 
the  market,  with  the  result  that  the  fall  in  price  is  retarded  and 
soon  stopped.  Likewise,  an  increase  in  price  diminishes  at 
onee  the  demand,  which  in  turn  tends  to  keep  the  price  down. 
In  the  case  of  goods  with  an  inelastic  demand,  however,  such 
retarding  influences  are  much  less  effective.  A  change  in  the 
price  of  salt  affects  demand  but  slightly.  Few  new  customers 
appear  when  the  price  declines,  few  quit  buying  when  the  price 
rises.  The  importance  of  this  economic  principle  appears  when 
we  consider  it  in  connection  with  the  production  of  wealth.  A 
bumper  crop  of  wheat,  for  example,  is  likely  to  result  in  rock- 
bottom  prices  with  a  considerable  loss  to  wheat-growers.  On 
the  other  hand,  the  manufacturer  of  some  luxury  who  should 
overestimate  the  demand  for  his  product  to  the  same  degree, 
would  suffer  a  less  proportionate  loss  than  the  farmers,  for 
multitudes  of  potential  buyers  are  ready  to  buy  just  as  soon  as 
the  price  of  the  luxury  is  slightly  reduced. 

The  close  relation  of  price  fluctuations  to  the  two  kinds 


NATURE  OF  CONSUMPTION  37 

of  demand,  has  a  practical  significance  in  business,  particularly 
in  retailing.  It  is  a  common  practice  of  merchants  in  all  lines 
to  advertise  cut  prices,  hoping  thereby  to  increase  trade  in  the 
merchandise  they  advertise.  Obviously,  aiiy  increase  in  trade  a 
merchant  may  hope  to  get  must  either  come  from  his  competitors 
or  arise  from  an  increased  demand  for  those  particular  goods. 
Whether  or  not  the  goods  advertised  have  an  elastic  or  an 
inelastic  demand,  the  advertising  merchant  will  profit  from 
any  trade  he  may  get  from  the  regular  customers  of  his  com- 
petitors, provided  he  sells  at  a  profit.  Also,  in  goods  subject 
to  an  elastic  demand,  there  is  always  the  probability  that  the 
advertising  merchant  may  increase  his  sales,  not  at  the  expense 
of  his  competitors,  but  by  increasing  demand  for  the  goods  which 
he  advertises.  In  goods  subject  to  inelastic  demand  the  case 
is  different.  If  he  offers  such  goods  at  reduced  prices,  his 
customers  stock  up  and  then  refrain  from  buying  more  until 
their  stock  is  exhausted;  and  what  is  not  less  important,  his 
competitors  reduce  prices  on  the  same  goods.  In  such  cases 
buyers  profit  at  the  expense  of  the  competing  merchants,  who  are 
unable  to  recoup  themselves,  simply  because  the  goods  under 
consideration  are  subject  to  the  law  of  inelastic  demand.  A 
jeweler,  for  example,  can  well  afford  to  attempt  to  increase 
his  trade  by  selling  diamonds  on  a  lower  margin  of  profit  than 
his  competitors,  for  by  so  doing  he  stands  a  chance,  not  only  to 
sell  to  some  of  the  regular  customers  of  his  competitors,  but 
also  to  those  who  otherwise  would  not  buy  diamonds;  and 
thus  in  the  long  run,  on  account  of  increased  sales,  to  increase  his 
profits.  The  grocer,  however,  finds  his  position  more  difficult. 
By  selling  coffee  or  sugar  or  salt  at  reduced  prices  he  can  hope 
to  increase  sales  only  at  the  expense  of  his  competitors  or  at  the 
expense  of  his  own  future  sales;  he  often  does,  however,  sell 
such  commodities  on  a  close  margin  or  even  at  a  loss  in  order 
to  induce  new  customers  to  come  into  his  store. 


38  ELEMENTARY  ECONOMICS 

EXERCISES  AND   PROBLEMS 


1.  Name  as  many  motives  for  economic  activities  as  you  can. 

2.  Do  these  motives  cause  the  same  activities  in  all  localities?  in 
all  groups  ? 

3.  What  is  the  distinction  between  necessities  and  luxuries  ? 

4.  Which  of  the  following  are  luxuries?  which  necessities? 
a.  Bread.  /.    Automobile. 

h.  Bicycle.  g.  Face  powder. 

c.  Watch.  h.  Kodak. 

d.  Diamond  ring.  i.   Newspaper. 

e.  Fountain  pen.  j.   Magazine. 

5.  Just  how  is  wealth  power? 

6.  What  is  the  difference  between  desire  and  demand? 

7.  Which  is  the  more  fundamental? 

8.  When  is  the  demand  for  a  good  said  to  be  elastic  ?  inelastic  ? 

9.  Why  does  the  price  of  potatoes  usually  fluctuate  more  widely 
than  the  price  of  pineapples  ? 

B 

1.  What  motives  for  economic  activity  are  the  most  noticeable 
among  your  acquaintances  ? 

2.  Make  a  list  of  your  wants  arising  from  instinct ;  from  habit ; 
and  from  social  standards. 

3.  Name  any  wants  not  included  in  the  above  list.  Why  do  they 
arise  ? 

4.  Mention  eight  articles  of  your  own  consumption  which  you 
consider  luxuries ;  eight  which  you  consider  necessities. 

5.  How  do  producers  in  your  community  seek  to  increase  the  desire 
for  goods  ? 

6.  Examine  store  and  shop  windows  and  try  to  determine  whether 
or  not  the  effectiveness  of  their  display  could  be  increased. 

7.  Make  a  list  of  ten  articles  sold  by  your  grocer;  ten  by  your 
druggist;  and  ten  by  your  hardware  dealer.  Arrange  the  articles 
in  each  list  according  to  elasticity  of  demand. 

8.  Which  of  th3S3  articbs,  if  any,  have  changad  in  elasticity  during 
the  past  gjnaration? 


NATURE   OF  CONSUMPTION  39 

C 

1.  "The  taie  welfare  of  society  depends  on  all  having  the  necessities 
of  life  before  any  has  luxuries." 

a.  What  is  meant  by  "true"  welfare? 

h.  Would  an  equal  distribution  of  goods  necessarily  supply  all 
with  necessities  ? 

c.  After  all  have  been  supplied  with  necessities,  which  luxury 

should  be  produced  first  ? 

d.  Does  a  demand  for  luxuries  ever  cause  an  increase  in  goods 

classed  as  necessities? 

2.  Explain  the  purpose  of  such  advertising  as,  "Dollar  and  a  half 
caps  now  ninety-eight  cents";  "These  gloves  are  worth  two  dollars, 
now  a  dollar  and  a  quarter"  ;  "Buy  now,  when  this  supply  is  gone  no 
more  can  be  obtained." 

3.  A  stock-raiser  recently  complained  that  the  use  of  the  auto- 
mobile as  a  pleasure  vehicle  tended  to  lower  the  price  of  driving  horses. 

a.  Are  driving  horses  worth  more  or  less  now  than  they  were  ten 

years  ago? 
h.  Account  for  other  forces  that  may  have  affected  the  price  of 

driving  horses. 
c.  Would  the  above  statement  be  necessarily  untrue  if  driving 

horses  are  worth  more  now  than  they  were  before  pleasure 

cars  came  to  be  so  widely  used?     Explain. 

4.  Suppose  the  supply  of  several  goods  be  doubled,  would  the  fall 
in  price  be  the  same  for  each  ?     Explain. 

5.  "The  demand  for  a  given  commodity  may  be  elastic  at  one  price 
level  and  inelastic  at  another."     Illustrate  and  explain. 

6.  The  claim  is  often  made  that  the  storage  of  eggs  results  in  lower 
prices  during  the  winter  months  than  would  otherwise  be  the  case. 

a.  How  are  summer  prices  affected  ? 

h.  How  is  the  average  annual  price  affected  ? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  79-110. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  103-110,  156-164. 

Fetter,  Economics,  Vol.  I,  pages  46,  61. 

Johnson,  Introduction  to  Economics,  pages  68,  69. 

Seager,  Principles  of  Economics,  pages  70-80. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  240-245. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  138-158. 


CHAPTER  IV 
LAWS    OF    CONSUMPTION 

9.  Human  Wants  Are  Unlimited 

Variation  in  the  intensity  of  wants.  —  We  have  seen  already 
that  human  wants  can  be  arranged  in  a  general  way  in  the  order 
of  their  intensity.  Any  individual  at  any  moment  of  time  has 
a  variety  of  unsatisfied  wants,  which  he  proceeds  to  satisfy,  as 
far  as  he  is  able,  in  the  order  of  their  intensity.  Standing 
first  of  all  are  the  wants  for  food,  clothing,  and  shelter,  though 
few  of  us  are  conscious  of  such  wants,  since  they  are  satisfied 
rather  automatically  as  they  arise.  Then  come  the  wants  of 
less  intensity,  the  nature  of  which  depends  on  the  peculiar 
desires  of  each  individual.  In  arranging  these  wants  in  their 
order  we  must  necessarily  assume  that  differences  in  the  prices 
of  the  goods  which  will  satisfy  them  are  a  factor ;  for  it  is  obvious, 
for  example,  that  one  might  have  a  more  intense  want  for  an 
automobile  than  for  a  bicycle,  and  yet  purchase  the  latter. 

Differences  in  the  intensity  of  wants  account  in  large  measure 
for  modem  advertising  and  modem  window  display.  Each 
advertiser,  as  we  have  already  noticed,  expects  to  increase  his 
business  at  the  expense  either  of  his  competitors  in  the  same 
line  or,  by  creating  demands  for  his  particular  goods,  of  sellers 
in  other  lines.  The  first  of  these  expectations  we  may  neglect 
at  the  present,  for  it  is  usually  realized,  if  at  all,  by  lower 
prices,  better  service,  and  good  will.  The  second  we  will 
examine  at  this  point.  A  retail  clothier,  let  us  say,  advertises 
through  the  newspapers  or  by  handbills  and  display  boards  the 

40 


LAWS  OF  CONSUMPTION  41 

excellence  of  the  goods  which  he  has  for  sale.  At  the  same  time 
he  also  arranges  his  windows  and  displays  his  stock  so  as  to  make 
his  goods  appear  as  attractive  as  possible  to  prospective  pur- 
chasers. If  every  one  could  determine  exactly  just  when  he 
needed  a  new  suit  of  clothing  and  governed  himself  accordingly, 
the  only  object  a  clothing  merchant  would  have  in  advertising ' 
would  be  to  get  business  away  from  competitors  in  the  same 
line.  The  normal  individual  makes  no  such  calculations,  and 
except  when  certain  dress-up  days,  such  as  Easter,  approach, 
few  men  give  any  serious  consideration  to  the  purchase  of 
clothing  unless  prompted  by  some  outside  influence.  In  other 
words,  the  intensity  of  the  want  for  a  new  suit  of  clothing  is 
usually  low.  Knowing  this,  the  seller  of  clothing  exerts  him- 
self through  advertising  and  display  to  stimulate  the  demand 
for  clothing ;  that  is,  he  endeavors  to  increase  the  intensity  of 
the  want  for  his  goods  to  the  point  where  sales  can  be  made.  In 
causing  the  need  for  a  new  suit  of  clothing  to  jump,  as  it  were, 
over  the  heads  of  other  needs  more  intense,  the  clothier  has 
postponed,  if  not  destroyed,  the  sale  of  goods  in  some  other  line. 
No  limit  to  human  wants.  —  We  have  seen  also  that  there 
is  no  limit  to  human  wants,  though  we  must  keep  clearly  in 
mind  that  there  are  limits  to  demands  for  goods.  If  any  one 
of  us  should  attempt  to  enumerate  all  the  goods  he  wanted,  it 
would  be  an  endless  task.  Each  individual  has  wants  not  only 
beyond  what  eventually  become  demands,  but  also  for  goods 
which  he  never  hopes  to  possess.  Many  of  these  remote  wants 
have  little  intensity ;  they  are  wants  nevertheless.  The  child 
that  cries  for  the  moon  or  the  young  person  that  builds  castles 
in  Spain,  expresses  an  unmistakable  want,  even  though  he 
does  not  realize  the  embarrassment  that  would  come  from 
having  it  gratified.  The  principle  of  the  insatiabiUty  of  wants 
has  an  important  application  to  industry,  particularly  to 
production.     Manufacturers  and  other  producers  need  usually 


42 


ELEMENTARY  ECONOMICS 


have  no  fear  that  their  products  will  not  be  wanted.  They 
must  remember,  however,  that  they  can  profit  from  these  wants 
only  when  they  rise  to  the  dignity  of  demands. 

Wants  and  social  progress.  —  The  v6ry  fact  that  wants  are 
incapable  of  being  satisfied  has  led  to  our  present  state  of 
civiUzation.     Any  individual  or  social  group,  such  as  a  people 


Cowlesy  of  Hart,  Schaffner  d^  Marx,  Chicago,  lU. 

Window  Display  of  a  Specialty  Stoke. 
(Contrast  with  display  on  opposite  page.) 

or  a  nation,  that  has  all  of  its  wants  satisfied,  is  in  danger  of 
decay,  if  indeed  it  has  already  passed  beyond  the  stage  of 
savagery.  Many  good  causes  have  been  assigned  for  the  lack 
of  social  and  industrial  progress  among  the  American  Indians, 
the  best  of  which  is  that  they  did  not  have  wants  sufficiently 
varied  and  intense  to  compel  them  to  give  up  their  roaming  life 
and  to  make  a  start  in  permanent  agriculture — in  other  words, 


LAWS  OF  CONSUMPTION 


43 


Courtesy  of  S.  S.  Kresge  Co..  Chicago,  III. 

Window  Display  of  a  Variety  Store. 

(Contrast  with  display  on  opposite  page.) 


44  ELEMENTARY  ECONOMICS 

to  go  to  work.  The  same  influence  partially  explains  the  differ- 
ences in  the  social  and  industrial  developments  among  various 
peoples.  The  inhabitants  of  tropical  and  subtropical  regions 
are  notoriously  unprogressive .  They  feel  no  need  for  permanent 
shelter  and  warm  clothing,  and  even  the  getting  of  sufficient 
food  is  a  simple  matter.  Granted  that  the  warm  climate 
dampens  their  enthusiasm  for  work,  the  significant  fact  remains 
that  the  kindness  of  nature  in  supplying  their  primitive  wants 
robs  them  of  their  best  energies.  Very  cold  climates,  on  the 
other  hand,  compel  so  much  labor  to  provide  bare  necessities 
as  to  leave  Httle  time  for  supplying  higher  wants.  It  is,  there- 
fore, in  the  temperate  regions  where  we  find  the  highest  develop- 
ment of  civilization.  There  nature  is  neither  too  liberal  nor  too 
exacting.  There  men,  though  they  must  supply  their  primitive 
wants  by  labor,  have  a  sufficient  surplus  of  time  and  energy 
left  to  supply  their  wants  for  higher  things. 

On  the  ground  that  an  increase  in  wants  produces  social 
progress  we  find  one  of  the  chief  justifications  for  much  of 
modem  advertising.  There  are  some  who  contend  that 
advertising  merely  results  in  changing  the  demand  either  from 
one  kind  of  a  good  to  another  or  from  one  good  to  a  similar 
good  merely  of  a  different  make  and  brand;  in  other  words, 
that  advertising  is  largely  a  social  waste.  Such  a  contention  is 
certainly  sound  to  a  degree,  but  above  and  beyond  is  the  influ- 
ence which  advertising  has  on  stimulating  individuals  to  greater 
endeavors  through  an  increase  in  the  intensities  of  their  wants. 

10.  The  Law  of  Diminishing  Utility 

Statement  of  the  law.  —  Although  the  sum  total  of  human 
wants  is  incapable  of  being  satisfied,  each  individual  experiences 
daily  the  satisfaction  of  particular  wants,  in  any  one  of  which 
he  can  observe  the  law  of  diminishing  utility.  This  law,  stated 
briefly,  is  that  as  identical  units  of  a  good  are  consumed,  the 


LAWS  OF  CONSUMPTION  45 


derived  from  the  preceding  one.  By  substituting  the  word 
**  possessed  ''  for  the  word  "  consumed  "  in  the  above  definition 
the  law  may  be  made  to  apply  to  a  stock  of  identical  goods  not 
actually  in  the  process  of  consumption. 

The  law  illustrated.  —  The  most  obvious  illustrations  of  the 
law  of  diminishing  utility  are  found  in  the  consumption  of 
food.  A  healthy  boy  with  a  plate  of  apples  before  him  will  eat 
the  first  one  eagerly.  The  second  he  will  consume  with  reUsh. 
Likewise,  the  third,  the  fourth,  the  fifth,  and  perhaps  the  sixth 
yield  satisfaction.  Finally,  no  matter  how  great  his  appetite 
may  be,  the  point  will  be  reached  when  he  cannot  eat  another  one. 
This  point  of  satiety  could  be  pushed  ahead  somewhat  by  sub- 
stituting other  kinds  of  fruit  and  especially  such  foods  as  meat, 
potatoes,  and  bread,  thus  offering  a  variety.  Even  then  the 
law  holds  true,  though  its  operation  is  not  so  easily  seen  as  it 
B  was  in  the  case  where  apples  alone  were  considered.  As  it  is 
^  with  food  so  it  is  with  all  other  consumable  goods.  One  suit 
of  clothing  is  a  necessity.  A  second  suit  for  Sundays  and  hoU- 
days  is  desirable.  A  third  suit  perhaps  would  serve  a  good 
purpose.  Each  yields  less  satisfaction  than  the  preceding  one, 
until  finally  the  most  fastidious  dandy  in  the  world  would  not 
care  to  have  another.  Obviously,  as  in  the  case  of  food,  the 
satisfaction  derived  from  each  additional  suit  will  diminish  more 
rapidly  if  all  the  suits  are  exactly  alike  ;  yet  no  matter  how  great 
the  variety  in  color,  texture,  weave,  or  style,  the  law  of  diminish- 
ing utility  holds  true.  Occasionally  there  are  outstanding 
exceptions  to  the  law,  which,  however,  do  not  invalidate  it. 
The  first  mouthful  of  some  foods  often  gives  less  satisfaction 
than  the  second  or  third.  Because  of  this  fact  many  persons 
are  compelled  "  to  learn  "  to  eat,  for  example,  oysters  or  olives. 
Similarly,  some  habitual  drinkers  find  that  they  like  the  second 
or  third  glass  of  hquor  better  than  the  first. 


46  ELEMENTARY  ECONOMICS 

11.  The  Law  of  Marginal  Utility 

The  law  stated.  —  We  have  already  established  the  principle 
that  the  possessor  of  a  suit  of  clothing  values  that  suit  more 
highly  than  he  would  a  second  one  exactly  like  it,  and  that 
a  third  would  yield  even  less  satisfaction  than  the  second.  Let 
us  suppose,  then,  assuming  that  he  has  three  suits  exactly  alike, 
that  he  attempts  to  determine  the  value  to  him  of  any  one  of  the 
suits.  We  have  seen  that  one  suit  was  absolutely  necessary, 
and  that  the  other  two  were  much  less  so.  Certainly,  then, 
being  in  possession  of  three  suits,  he  will  not  say  that  any  one 
of  them  is  necessary,  for  he  would  still  have  two  left  if  one  were 
taken  away.  Obviously,  therefore,  the  valuation  he  will 
place  on  any  one  of  the  three  suits  would  be  less  than  the  val- 
uation he  would  place  on  one  suit  if  he  possessed  no  other. 
Nor,  by  the  Same  reasoning,  will  he  value  any  two  of  the  three 
suits  as  highly  as  he  would  if  he  had  but  two.  He  will,  however, 
consider  any  one  of  the  three  suits  as  having  exactly  the  same 
value  to  him  as  another  suit  would  have  if  he  already  possessed 
two.  We  are  now  ready  to  state  the  law  of  marginal  utility : 
The  marginal  utility  of  a  series  of  goods  is  the  utility  of  the  last 
unit.  This  utility,  we  may  say,  is  measured  by  the  use  to  which 
the  last  unit  can  be  put.  If,  to  use  an  extreme  example,  he 
used  the  third  suit  to  dress  a  manikin,  then  the  value  he  would 
attribute  to  any  one  of  the  three  suits  would  depend  entirely  on 
the  satisfaction,  slight  as  it  might  be,  which  he  would  derive 
from  that  particular  use. 

The  law  further  illustrated.  —  We  can  understand  more 
clearly  how  the  law  of  marginal  utility  operates  by  selecting 
our  illustrations  from  fanciful  though  striking  conditions  of 
life.  Let  us  suppose  that  a  lone  traveler  in  a  large  forest  has 
among  other  things  a  gun  and  ten  cartridges.  Let  us  suppose 
further  that  he  calculates  that  five  of  the  cartridges  will  suffice 


LAWS  OF  CONSUMPTION  47 

to  protect  him  from  wild  beasts  and  savages ;  that  three  will 
provide  him  with  game,  which  it  is  not  absolutely  necessary 
to  have  since  he  has  a  sufficient  supply  of  bread  and  salted 
meat  to  sustain  him  on  the  journey ;  and  that  two  will  furnish 
him  amusement  in  firing  at  a  target.  We  may  now  properly 
raise  the  question :  What  value  does  our  traveler  place  on  any 
one  of  the  ten  cartridges,  which,  we  have  assumed,  are  exactly 
ahke  in  every  respect?  To  arrive  at  an  answer,  let  us  suppose 
that  before  he  has  had  a  chance  to  use  a  single  one  of  them  he 
accidentally  loses  two.  Since  they  are  all  exactly  alike,  which 
two  has  he  lost  ?  Two  of  the  five  which  he  expected  to  use  in 
defending  his  life?  Two  of  the  three  he  expected  to  use  in 
procuring  fresh  meat?  Assuredly  not.  Being  a  sensible 
traveler  he  will  forego  shooting  at  the  target.  Here,  then,  we 
find  the  answer  to  our  question.  The  value  which'  our  traveler 
places  on  any  one  of  his  ten  cartridges  is  measured  by  the  satis- 
faction he  will  derive  from  the  least  important  use  to  which  he 
has  planned  to  put  them.  To  push  the  illustration,  let  us 
suppose  that  the  traveler  loses  five  of  the  ten.  What  now  will 
be  his  conduct  ?  Will  he  shoot  at  a  target  ?  Will  he  shoot  game 
for  food?  Here  again  the  answer  is,  iVo.  The  decrease  of  the 
number  of  cartridges  from  five  to  four  may  mean  the  loss  of 
his  life,  which  certainly  he  values  more  highly  than  the  pleasure 
he  would  get  from  shooting  at  a  mark  or  from  feasting  on  fresh 
meat.  Conversely,  if  after  losing  five  of  the  cartridges  he  finds  a 
sixth,  we  may  beheve  that  the  possession  of  the  sixth  cartridge 
causes  his  marginal  utiUty  for  cartridges  to  fall,  since  now  he  can 
and  will  use  one  of  them  to  gratify  a  want  which  he  was  un- 
willing to  gratify  when  he  had  but  five. 

To  illustrate  the  same  law  in  another  way,  let  us  suppose 
that  a  shipwrecked  sailor  finds  himself  adrift  in  a  rowboat 
with  his  dog  and  two  biscuits.  Let  us  also  assume  that  the 
sailor  values  his  own  life  more  highly  than  he  does  that  of  the 


48  ELEMENTARY  ECONOMICS 

dog,  and  that  he  knows  that  one  biscuit  for  him  and  one  for  the 
dog  will  sustain  the  life  of  both  until  they  are  picked  up.  With 
these  notions  clearly  fixed  in  mind,  the  sailor  loses  one  of  the 
biscuits  in  the  water.  Which  biscuit  did  he  lose,  his  biscuit  or 
the  dog's  biscuit?  Supposing,  as  we  have,  that  he  values  his 
Hfe  more  highly  than  he  does  that  of  the  dog,  and  that  he  will 
need  to  consume  an  entire  biscuit  to  sustain  life  until  picked  up, 
our  answer  must  be  that  it  was  the  dog's  biscuit  which  fell 
overboard. 

Applications  of  the  law.  —  The  law  of  marginal  utility, 
though  we  may  not  be  conscious  of  the  fact,  is  closely  related 
to  many  of  our  everyday  acts  and  to  many  of  our  comparisons 
of  values.  Usually,  for  example,  when  we  purchase  a  pair  of 
shoes,  we  could,  if  we  cared  to  do  so,  purchase  a  second  pair 
exactly  Uke  *  the  first.  Our  reason  for  not  purchasing  the 
additional  pair  is  that  the  use  to  which  we  could  put  any  one 
of  the  two  pairs  will  yield  less  satisfaction  than  we  can  get  from 
the  same  amount  of  money  spent  for  some  other  good,  say  a 
hat.  We  will,  however,  purchase  the  second  pair  if  the  mer- 
chant reduces  the  price  sufficiently  to  meet  the  satisfaction 
which  we  estimate  a  second  pair  of  shoes  would  give  us.  Practi- 
cally all  of  the  buying  in  quantities  of  consumable  goods  is 
governed  more  or  less  by  this  law. 

In  making  comparisons  of  the  values  of  certain  goods  we 
often  fail  to  arrive  at  correct  conclusions  because  we  ignore  the 
law  of  marginal  utility.  Suppose  the  question  were  asked : 
Which  is  the  more  valuable,  gold  or  iron?  diamonds  or  bread? 
perfume  or  water?  Obviously,  bread  and  water  are  necessary 
to  sustain  life,  while  modem  civilization  is  built  on  iron.  Yet 
water  is  usually  free  for  the  taking,  while  bread  and  iron  are 
among  the  cheapest  of  staple  goods.  To  clear  the  way  for  a 
correct  answer  we  must  first  contrast  the  marginal  utility  of  a 
good  with  its  total  utility.     The  marginal  utility  of  gold  is  much 


LAWS  OF  CONSUMPTION  49 

greater  than  the  marginal  utihty  of  iron ;  that  is,  the  loss  of  a 
unit  of  gold  would  be  more  keenly  felt  than  the  loss  of  a  similar 
unit  of  iron.  The  total  utility  of  iron,  however,  is  much  greater 
than  the  total  utility  of  gold.  Perhaps  the  matter  will  be  clearer 
if  instead  of  gold  and  iron  we  consider  perfume  and  water. 
We  use  water  in  a  great  variety  of  ways,  some  of  which  yield 
satisfactions  of  a  very  low  degree.  On  the  other  hand,  the  poor- 
est use  to  which  we  put  perfume  is  likely  to  yield  a  relatively 
high  satisfaction.  For  this  reason  the  marginal  utility  of 
perfume  is  greater  than  the  marginal  utility  of  water.  We 
must,  however,  keep  clearly  in  mind  the  fact  that  the  total 
utility  of  water  is  greater  than  the  total  utility  of  perfume,  for 
without  the  former  we  would  find  it  impossible  to  sustain  life 
itself.  While  the  latter  we  could  forego  entirely  with  no  serious 
effect  other  than  a  comparatively  few  people  being  incon- 
venienced. 

The  relation  of  marginal  utility  of  water  to  its  total  utility  is 
shown  graphically  in  Fig.  2.  The  incompleted  rectangle  A, 
which  we  will  leave  open  at  the  top  since  few  if  any  would  be 
willing  to  set  a  value  on  their  own  lives,  represents  the  greatest 
satisfaction  an  individual  can  get  from  the  consumption  of 
water.  Rectangle  B  represents  the  satisfaction  derived  when  a 
second  unit  of  water  is  put  to  a  less  important  use,  say  in 
cooking,  while  rectangles  C  to  M  represent  decreasing  satis- 
factions resulting  from  decreasingly  important  uses.  Since 
water  is  practically  a  free  good  we  can  assume  that  the  height 
of  M  is  zero.  In  this  case  the  marginal  utility  of  water  would 
be  zero  while  its  total  utility  would  be  infinitely  great. 

We  may  now  properly  consider  the  relation  between  the 
marginal  utility  and  the  total  utility  of  a  good  which  is  neither 
necessary  to  sustain  life  nor  free  for  the  using.  A  good  example 
is  dining-room  chairs.  Obviously,  as  was  the  cavse  in  the  earliest 
frontier  homes,  any  American  family  could  do  entirely  without 


50 


ELEMENTARY  ECONOMICS 


the  use  of  chairs  in  the  dining-room.  We  will  assume,  however, 
that  common  decency  demands  two  chairs,  each  yielding  exactly 
the  same  satisfaction,  represented  in  Fig.  3  by  rectangles  A  and 


B.  A  third  chair  (C)  may  also  be  desired,  though  it  would 
yield  less  satisfaction  than  the  first  or  second.  Even  a  fourth 
(D),  fifth  (E),  and  sixth  (F)  can  be  used  occasionally  to  advan- 
tage. 

The  marginal  utility  of  the  six  chairs  is  represented  by  the 
rectangle  F.  The  total  utility  of  the  six  is  found  not  by  mul- 
tiplying the  rectangle  F  by  six,  but  by  adding  all  the  rectangles. 

Consumers'  surplus.  —  The  rectangle  F  in  Fig.  3  represents 
not  only  the  marginal  utility  of  the  six  chairs,. but  also  the  price 
paid  for  each  of  the  six.  The  total  price,  therefore,  of  the 
six  is  represented  by  the  rectangle  PO.     Clearly,  then,  the 


LAWS  OF  CONSUMPTION 


51 


purchaser  of  the  six  chairs  enjoys  a  greater  satisfaction  from  five 
of  them  than  he  would  have  enjoyed  had  he  spent  his  money 
for  other  goods,  for  we  may  assume  that  the  utihty  yielded  by 
the  sixth  chair  is  measured  by  the  price  of  each  of  the  six  chairs. 
This  excess  satisfaction  is  known  as  consumers'  surplus.  In  the 
case  of  each  chair  it  is  the  difference  between  the  price  paid, 
represented  by  the  margin,  and  the  price  that  would  have  been 
paid  rather  than  to  forego  its  use. 

The  principle  of  the  consumers'  surplus  is  the  basis  of  all 
trade  and  exchange.  In  the  middle  ages  the  opinion  prevailed 
that  only  one  party  to  a  trade  could  be  benefited.     This  opinion 


y 

• 

p 

P 

A 

B 

C 

D 

E 

F 

X 


Fig.  3. 


we  now  hold  to  be  erroneous.  In  practically  all  of  our  pur- 
chases and  exchanges,  even  though  we  desire  but  a  single  unit 
of  any  good,  we  enjoy  a  consumers'  surplus.  If  such  were  not 
the  case  few  exchanges  would  take  place,  since  each  one  would 
prefer  his  own  goods  to  the  goods  of  another. 


52  ELEMENTARY  ECONOMICS 

EXERCISES   AND   PROBLEMS 


1.  What  evidence  is  there  that  the  sum  total  of  human  wants  cannot 
be  satisfied? 

2.  Why  does  a  clothier  often  advertise  without  mentioning  prices? 

3.  How  does  variety  affect  consumption? 

4.  Does  the  law  of  diminishing  utility  apply  to  the  possession  of 
money  ? 

5.  If  the  supply  of  goods  be  increased,  how  would  the  value  of  each 
unit  be  affected?  the  value  of  the  total  stock?     Explain. 

6.  Why   is   money   usually   said   to   have   a   "  reflected "  marginal 
utility  ? 

7.  Explain  the  conditions  under  which  a  large  consumers'  surplus 
would  exist ;  a  small  consumers'  surplus. 

8.  Why  is  it  more  difficult  to  measure  the  consumers'  surplus  of  water 
than  of  oranges? 


1.  Compare  the  window  display  of  a  ten-cent  store  with  the  window 
display  of  a  dealer  in  ladies'  ready-to-wear  garments  in  the  following 
respects : 

a.  Variety  of  goods  displayed. 
h.  Price  tags. 

c.  Attractiveness. 

d.  Effect  on  intensity  of  wants. 

2.  Name  25  nationally  advertised  goods.  Why  does  a  monopolist 
advertise  his  products? 

3.  Make  a  list  of  ten  of  your  personal  wants  in  the  order  of  their 
intensity.  Would  this  order  be  changed  if  each  were  multiplied  by 
five? 

4.  Make  a  list  of  the  articles  you  would  buy  if  you  had  $100.  How 
would  this  list  be  affected  if,  instead  of  $100,  you  had  $200? 

a.  Would  the  number  of  items  be  increased? 
h.  Would  the  first  list  contain  items  not  included  in  the  second 
list? 

c.  Would  the  second  list  contain  the  same  amount  of  any  item 

or  items  included  in  the  first  list  ? 

d.  Is  it  likely  that  the  second  list  will  contain  but  one  item? 


LAWS  OP  CONSUMPTION  53 

5.  Call  to  mind  some  recent  purchases  you  have  made.  In  which 
did  each  of  the  following  have  an  influence : 

a.  Law  of  diminishing  utility? 
h.  Law  of  marginal  utility? 
c.   Consumers'  surplus? 

6.  Estimate  the  amount  of  consumers'  surplus  in  the  purchase  of  a 
lead  pencil,  a  pair  of  shoes,  a  dish  of  ice  cream,  a  loaf  of  bread,  a  suit 
of  clothing. 


1.  Many  people  condemn  window  displays  and  advertising  as  an 
economic  waste.     Discuss  from  the  standpoint  of : 

a.  Social  progress. 

h.  Service  to  the  consumer. 

c.   Good  will  in  merchandising. 

2.  A  prominent  lawyer  recently  told  the  story  of  how  his  greatest, 
unattained  ambition  when  a  boy  had  been  to  own  a  shotgun.  Now  he 
has  wealth  enough  to  buy  hundreds  of  such  guns,  but  has  not  one. 

a.  Account  for  his  change  in  desires. 

h.   Did  he  have  a  demand  for  a  gun  when  he  was  a  boy? 

c.   Has  he  now  a  demand  for  a  gun? 

3.  "A  clothier,  when  he  goes  into  the  market  to  buy  goods,  usually 
has  some  adequate  notion  of  the  marginal  utilities  of  his  customers.'' 

a.  Why  do  some  clothiers  handle  only  expensive  clothing  ? 

6.  Why  do  others  handle  cheaper  grades? 

c.  Why  do  some  handle  both  expensive  and  cheap  grades? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  84^96. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  132-139. 

Fisher,  Elementary  Principles  of  Economics,  pages  281-300. 

Johnson,  Introduction  to  Economics,  pages  23-28. 

Seager,  Principles  of  Economics,  pages  89-100. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  173-184. 

Taussig,  Principles  of  Economics,  2d  ed..  Vol.  I,  pages  124-137. 


CHAPTER  V 

DEMAND,    SUPPLY,    AND    PRICE 

12.   Relation  of  Demand  and  Supply  to  Price 

Nature  of  demand  and  supply.  —  No  two  terms  employed  in 
the  language  of  economics  are  better  known  and  oftener  mis- 
used than  demand  and  supply.  One  of  the  most  severe  critics 
of  our  subject  once  said  that  a  parrot  could  be  made  an 
economist  by  merely  teaching  him  to  answer  ''  demand  and 
supply  "  to  every  question  put  to  him.  This  statement  was 
extreme  and  meant  to  ridicule.  Yet  it  has  a  sound  foundation, 
for  relatively  few  people  have  ever  seriously  attempted  to 
analyze  the  nature  of  these  terms.  We  have  already  seen  that 
demand  is  effective  desire  ;  also  that  an  individual  has  a  demand 
only  when  he  is  willing  and  able  to  satisfy  it  by  foregoing  the 
use  of  other  goods  —  that  is,  to  pay  the  current  price.  Desires, 
therefore,  are  constantly  becoming  demands.  In  the  light  of 
this  knowledge  we  can,  by  recasting  slightly  the  meaning  of  the 
word  demand,  say  that  there  are  active  demands  (demands  in 
the  strict  sense  of  the  word)  and  potential  demands  (desires  or 
wants) . 

Likewise,  supply  may  mean  one  of  three  things.  First,  it 
may  mean  the  supply  of  goods  offered  at  the  current  price  — 
that  is,  the  supply  which  owners  are  willing  to  furnish  on  the 
instant  at  the  market  price.  Second,  supply  may  mean,  in 
addition  to  the  amount  supplied,  goods  that  would  be  offered 
at  higher  prices.  Third,  it  may  mean  goods  not  yet  produced, 
owing  either  to  a  lack  of  time  or  to  an  unsatisfactory  market 

54 


DEMAND,   SUPPLY,   AND   PRICE  55 

price.  When  we  speak,  therefore,  of  demand  and  supply  we 
ought  to  have  clearly  in  mind  the  exact  nature  of  each.  Other- 
wise, we  are  almost  sure  to  create  confusion,  and  to  acquire 
habits  of  loose  thinking. 

It  is  apparent  no  doubt  that  neither  demand  nor  supply 
works  independently  of  the  other ;  that  there  is  a  close  mutual 
relationship.  Any  increase  in  demand,  other  things  remaining 
equal,  produces  a  change  in  supply;  and  conversely,  any 
change  in  supply  produces  a  change  in  demand.  Professor 
Marshall  has  likened  them  to  the  two  blades  of  a  pair  of  shears, 
both  of  which  are  necessary  if  any  cutting  is  to  be  done.  It  is 
also  apparent  from  this  analogy  that  supply  and  demand 
naturally  tend  to  approach  each  other.  Increase  in  demand 
tends  to  raise  price,  and,  consequently,  causes  an  increase  in 
supply.  An  increase  in  supply,  on  the  other  hand,  tends  to 
lower  price,  thus  increasing  the  demand. 

Effect  of  demand  and  supply  on  price.  —  From  what  has  just 
been  said  we  may  conclude  that  the  price  of  any  good  is  deter- 
mined by  the  demand  for,  and  the  supply  of,  that  particular 
good.  Generally  speaking,  such  is  the  case  ;  but  a  few  modifi- 
cations in  the  statement  will  lead  to  a  more  definite  under- 
standing. Demand  is  used  here  as  nothing  more  or  less  than 
the  willingness  and  the  ability  of  those  who  desire  to  possess 
the  good,  to  pay  the  market  price.  Supply,  as  we  have  just 
seen,  may  mean  one  of  several  things.  In  this  case  it  means  the 
quantity  of  the  particular  good  offered  for  sale,  and  does  not 
include,  as  many  think,  the  whole  amount  of  such  good  in 
existence.  In  other  words,  the  price  is  set  not  by  desires  for 
any  good  on  the  one  hand,  and  the  total  supply  of  that  good 
on  the  other ;  but  by  demand  (effective  desire)  and  the  volume 
freely  offered  to  fill  this  demand. 

The  effect  of  price  on  demand  and  supply.  —  Usually  when 
the  statement  is  made  that  price  is  determined  by  demand 


56  ELEMENTARY   ECONOMICS 

and  supply,  the  one  making  the  statement  does  not  realize  the 
full  significance  of  the  effect  of  prices  on  demand  and  supply. 
Let  us  assume,  as  is  always  the  case,  a  given  market  price  for 
some  particular  good  on  a  given  day.  Producers  who  are 
selling  their  goods  advantageously,  and  they  are  likely  to  pre- 
dominate, will  exert  themselves  to  increase  the  supply.  An 
increased  supply  at  the  old  price  will  not  be  taken.  Conse- 
quently, sellers  will  reduce  prices,  thereby  increasing  demand. 
Enough  has  been  said  to  enable  us  to  make  several  additional 
general  statements  of  principles  that  underlie  the  relation  of  the 
three  notions  —  demand,  supply,  and  price.  (1)  Demand  and 
supply  mutually  affect  each  other  through  price.  (2)  Price  is 
the  immediate  factor  in  the  determination  of  the  volume  of  demand 
or  supply. 

13.   Determination  of  Market  Price 

Maximum  and  minimum  prices.  —  When  buyers  and  sellers 
come  into  a  market,  each  buyer  has  in  mind  the  maximum  price 
he  will  pay  for  a  good,  while  each  seller,  on  his  part,  has  deter- 
mined on  a  minimum  price.  Provided  nothing  occurs  to  change 
these  determinations,  no  exchange  will  take  place  unless  the 
maximum  price  of  the  buyer  is  equal  to,  or  greater  than,  the 
minimum  price  of  the  seller.  Here,  then,  is  the  most  funda- 
mental notion  in  the  determination  of  market  price. 

In  determining  a  maximum  price  the  buyer  estimates  the 
marginal  utility  of  the  good  he  desires,  measuring  it  by  com- 
paring the  satisfaction  which  this  good  will  yield  with  the 
satisfaction  yielded  by  some  other  good  or  goods  of  the  same 
price.  If  he  desire  more  than  one  unit  of  the  good,  the  marginal 
utility  will  ordinarily  be  lower  than  if  he  desired  but  one  unit. 
The  seller's  problem  of  determining  a  minimum  price  is  a  much 
simpler  matter.  Whereas  the  buyer's  determination  is  largely 
^n  estimate,  often,  as  we  have  seen,  wholly  disproportionate  to 


DEMAND,   SUPPLY,   AND   PRICE  67 

his  wealth,  the  seller's  determination  is,  except  under  extraor- 
dinary circumstances,  fixed  for  him  by  the  expense  he  has 
incurred  in  procuring  the  good.  The  prospective  buyer  of  a 
suit  of  clothing,  for  example,  can,  at  the  best,  have  but  a  hazy 
notion  of  the  maximum  price  he  will  pay  for  a  particular  suit. 
The  merchant,  on  the  other  hand,  knows  almost  exactly  the 
minimum  price  he  can  accept  for  it  without  suffering  a  loss. 

Buyers'  and  sellers'  surplus.  —  Assuming  that  the  buyer's 
maximum  price  exceeds  the  seller's  minimum  price,  we  may 
conclude  that  an  exchange  will  take  place  at  some  point  between 
these  extremes.  If  the  exchange  is  for  one  unit  of  goods  at 
or  near  the  buyer's  maximum  price,  it  is  readily  seen  that  he 
will  enjoy  little  or  no  consumers'  surplus.  If,  however,  the 
exchange  is  at  or  near  the  maximum  price  set  by  the  buyer  for 
each  of  several  units  he  will,  as  we  have  seen,  enjoy  a  consumers' 
surplus.  The  seller  also  enjoys  a  sellers'  surplus,  which  we  may 
define  as  the  difference  between  his  minimum  price  and  the 
market  price.  Since  market  price  is  usually  somewhere  between 
the  buyers'  maximum  and  the  sellers'  minimum,  each  group 
enjoys  a  surplus,  the  size  of  which  in  a  barter  regime  would  be 
largely  determined  by  the  higgling  ability  of  the  parties  to  the 
trade. 

Four  possible  market  conditions.  —  A  market  price  may 
result  from  any  one  of  four  conditions  :  (1)  One  buyer  and  one 
seller,  (2)  one  buyer  and  several  sellers,  (3)  several  buyers  and 
one  seller,  and  (4)  several  buyers  and  several  sellers. 

The  first  of  these,  one  buyer  and  one  seller,  is  now  of  no  great 

iportance,  though  it  characterized  trade  at  an  earlier  day, 

when  men  lived  far  apart  and  exchanged  goods  with  Uttle 

^reference    to    community   demands.   .Occasionally   even   now 

exchanges  are  made  in  which  there  are  but  one  buyer  and  one 

jller:   the  owner  of  a  family  heirloom,  a  stranger  let  us  say, 

l^ffers  to  sell  the  heirloom  to  the  only  remaining  member  of  the 


58  ELEMENTARY   ECONOMICS 

family.  The  determination  of  price  in  this  case  bears  two  char- 
acteristics not  usually  met.  First,  both  the  buyers'  surplus 
and  the  sellers'  surplus  are  likely  to  be  exceptionally  large. 
Second,  the  good  exchanged  is  incapable  of  reproduction. 

Almost  as  rare  under  free  competition  are  the  cases  where 
there  are  one  buyer  and  several  sellers.  Frequently,  however, 
some  buying  monopolist  controls  the  market.  While,  as  we 
shall  see  presently,  he  is  restrained  from  pretending  to  have  a 
ridiculously  low  maximum  price,  he  can,  and  often  does,  as  in 
the  case  of  crude  oil,  iron  ore,  and  leaf  tobacco,  enjoy  an  excessive 
buyers'  surplus.  Fortunately  for  the  sellers,  law  and  popular 
feeling  frown  on  buyers'  monopolies. 

Monopolistic  also  is  the  third  condition,  where  there  are 
several  buyers  and  one  seller,  though  usually,  as  under  the 
second  condition,  the  monopoly  is  not  complete.  Any  one  of 
the  so-called  trusts  we  may  consider  the  single  seller;  the 
public,  the  several  buyers.  The  Standard  Oil  Company,  for 
example,  while  its  monopoly  is  not  complete,  represents  the 
single  seller,  while  the  users  of  gasoline,  to  name  only  one  group 
of  its  customers,  comprise  the  buyers. 

The  fourth,  and  by  far  the  most  important  condition  under 
which  a  market  price  is  established,  is  when  there  are  several 
buyers  and  several  sellers.  Here  we  find  each  buyer  with  his 
own  notion  of  a  maximum  price,  and  each  seller  knowing  rather 
definitely  his  minimum  price,  which,  as  we  have  seen,  is  deter- 
mined by  his  expenses  of  production.  Here  too,  we  must 
assume  competition  to  be  free  and  active,  and  each  buyer 
and  seller  to  be  desirous  to  drive  the  best  bargain  possible. 
With  these  assumptions  in  mind  we  can  now  turn  our  attention 
to  the  determination  of,  market  price  under  competitive  con- 
ditions. 


DEMAND,   SUPPLY,  AND  PRICE 


59 


I 


14.  The  Competitive  Market  Price 

Buyers'  schedule.  —  To  simplify  matters,  let  us  suppose  that 
seven  men,  each  desiring  to  purchase  one  bicycle,  attend  a 
bicycle  auction  where  the  goods  offered  for  sale  are  ahke  in  every 
respect,  and  where  both  buyers  and  sellers  are  permitted  freely 


Fig.  4. 


X 


to  make  offers.  These  seven  buyers  we  will  indicate  by  the 
letters  A,  B,  C,  D,  E,  F,  G.  To  complete  our  supposition  let 
us  attach  to  each  of  the  seven  buyers  the  following  maximum 
prices:  A  — 30,  B  —  28,  C  —  27,  D  —  24,  E  — 21,  F— 16, 
G  —  11.  Clearly,  the  valuations  differ  widely,  but  that  is 
exactly  the  situation  under  actual  business  conditions;  for 
the  valuations  we  have  attached  to  these  seven  buyers  rep- 
resent desires  which  may  or  may  not  become  demands ;  and 
we  can  know  whether  or  not  they  become  demands  only  when  we 


60  ELEMENTARY   ECONOMICS 

know  the  etad  location  of  the  market  price.  If,  for  example, 
the  market  price  should  be  fixed  at  25,  D,  E,  F,  and  G  would  not 
have  a  demand  for  bicycles,  for  demand  implies  both  the 
willingness  and  the  ability  to  pay  the  market  price.  Obviously, 
then,  we  must  next  turn  our  attention  to  the  sellers,  who  are 
equally  as  necessary  as  the  buyers  in  fixing  a  market  price. 

Sellers'  schedule.  —  Each  seller,  as  we  have  seen,  has  in 
mind  a  minimum  price  under  which  he  cannot  go  without 
sustaining  a  loss.  Accordingly,  each  of  the  sellers  of  bicycles  — 
seven^  let  us  say,  with  one  bicycle  each  —  who  attends  our 
assumed  bicycle  auction  has  settled  on  the  lowest  price  he  will 
take  for  his  bicycle.  As  in  the  case  of  the  buyers  we  can 
represent  the  sellers  by  letters,  as  R,  S,  T,  U,  V,  W,  Z.  Also 
we  can  attach  minimum  prices  to  each  of  them  as  follows : 
R— 17,  S— 18,  T  — 20,  U  — 23,  V  — 28,  W  — 31,  Z  — 40. 
In  the  preceding  section  it  was  noted  that  we  could  not  deter- 
mine the  number  of  bicycles  demanded  until  the  market  price 
was  fixed.  A  similar  difficulty  exists  in  the  determination  of 
the  available  supply,  since,  according  to  our  assumption, 
those  sellers  whose  minimum  price  exceeds  the  market  price 
will  withdraw  their  bicycles  from  the  auction.  Fig.  4  illustrates 
graphically  the  character  of  the  various  demands;  Fig.  5  of 
the  various  supplies. 

Fmng  the  market  price.  —  Before  proceeding  to  determine 
just  where  the  price  would  be  fixed,  it  will  simplify  matters 
to  eliminate  those  buyers  and  sellers  who  clearly  have  no  chance 
to  participate  in  the  auction  —  that  is,  those  buyers  who  cannot 
possibly  have  a  demand  and  those  sellers  with  minimum  prices 
above  the  maximum  price  of  the  highest  bidder  among  the 
buyers.  Buyer  G,  whose  maximum  price  is  11,  cannot  have  a 
demand,  for  the  lowest  minimum  price  among  the  sellers  is  17. 
For  the  same  reason,  F  must  withdraw  from  the  auction. 
Similarly,  sellers  W  and  Z  must  withdraw,  for  the  minimum 


\ 


DEMAND,   SUPPLY,   AND   PRICE 


61 


price  of  either  exceeds  the  maximum  price  of  any  one  of  the 
buyers.  There  remain,  then,  five  buyers  and  five  sellers,  who, 
so  far  as  we  have  determined  up  to  this  point,  will  assist  to  fix 
the  market  price.     We  are  now  ready  for  the  auction  to  open. 


0 


Fig.  5. 


Buyer  A  announces,  let  us  say,  that  he  will  pay  30  for  one 
bicycle.  Immediately  five  sellers  each  offer  him  a  bicycle  at 
that  price.  Seeing  that  he  may  be  able  to  get  a  better  bargain 
by  holding  off,  A  refuses  to  buy.  The  sellers  then  begin  to 
reduce  their  prices.  When  they  drop  to  28  a  second  buyer 
(B)  comes  into  the  market.  We  then  have  five  sellers  and  two 
buyers.  Prices  will  continue  to  fall.  When  they  pass  below 
28,  V  will  drop  out,  leaving  two  buyers  and  four  sellers.     At  27 


62 


ELEMENTARY   ECONOMICS 


\ 


a  third  buyer's  desire  becomes  a  demand.  Then  we  have  four 
sellers  and  three  buyers.  Clearly,  no  one  of  the  four  sellers 
would  permit  the  downward  movement  of  the  price  to  stop  at 
this  point  if  it  resulted  in  his  making  no  sale,  and  that  is 
exactly  what  would  happen.  One  bicycle  would  remain  unsold. 
At  26  the  same  condition  remains;  so  also  at  25.  When  24 
is  reached,  however,  a  fourth  buyer  (D)  cries  out  that  he  will 


Fig.  6. 


take  a  bicycle  at  that  price.  Now  we  are  near  the  market 
price,  which  is  likely  to  be  found  anywhere  between  24  and  23, 
the  exact  point  being  determined  largely  by  the  ability  of  either 
group  to  bargain  successfully.  With  the  market  price  estab- 
lished between  these  two  limits,  23  and  24,  we  find  that  three 


DEMAND,   SUPPLY,   AND   PRICE  63 

of  the  seven  buyers  do  not  have  a  demand  for  bicycles,  and  that 
three  of  the  seven  sellers  are  unwilling  to  furnish  any  of  the 
supply  at  that  price.  We  find  also  that  the  market  price  is  that 
which  produces  the  greatest  number  of  sales. 

To  make  the  matter  clearer  let  us  bring  Figs.  4  and  5  together 
in  Fig.  6.  Here  we  see  that  buyers  A,  B,  C,  and  possibly  D, 
have  a  buyers'  surplus.  A's  surplus  is  represented  by  the  verti- 
cal distance  from  A  on  the  demand  curve  to  the  horizontal  line 
marked  PP'.  Similarly,  the  surpluses  of  B,  C,  and-D  may  be 
determined.  To  express  the  same  thing  mathematically,  we 
say  that  the  surplus  of  each  buyer  is  the  difference  between  his 
maximum  price  and  the  market  price.  Likewise,  the  surplus 
of  any  one  of  the  sellers  is  the  difference  between  his  minimum 
price  and  the  market  price. 

In  the  above  assumptions  the  simplest  condition  possible 
has  been  chosen,  though  the  conclusion  reached  holds  true  for 
the  most  complex  condition  in  fixing  market  price.  It  is  con- 
ceivable, first  of  all,  that  any  one  of  the  buyers  might  have 
had  a  desire  for  more  than  one  bicycle.  If,  for  example,  A  had 
been  willing  not  only  to  pay  30  for  one  but  also  to  pay  29  for 
each  of  two,  the  market  price  would  have  been  fixed  between 
23  and  27  instead  of  between  23  and  24.  Second,  the  three 
sellers  who  found  the  market  price  below  their  minimum  prices 
might,  in  a  moment  of  panic,  have  thrown  their  bicycles  on  the 
market  at  a  sacrifice  rather  than  to  hold  them.  In  this  case 
tlie  market  price  would  have  been  fixed  still  lower.  Third, 
under  actual  business  conditions  it  is  improbable  that  the 
bicycles  would  have  been  exactly  alike.  Such  complexities, 
however,  merely  complicate  the  fixing  of  market  prices  under 
free  competition,  and  do  not,  as  one  might  think  at  first  glance, 
run  contrary  to  the  principle  we  have  worked  out  under  simpler 
conditions. 


64  ELEMENTARY   ECONOMICS 

EXERCISES   AND   PROBLEMS 


1.  Wliat  is  meant  by  the  expression  "supply  and  price"? 

2.  How  is  price  affected  by  demand?  by  supply? 

3.  How  does  price  affect  demand  ?  supply  ? 

4.  Why  do  sellers  have  minimum  prices  ? 

5.  How  does  each  determine  his  minimum  price? 

6.  Why  do  buyers  have  maximum  prices  ? 

7.  How  does  each  determine  his  maximum  price? 

8.  What  are  some  of  the  different  meanings  of  "market"? 

9.  Does  the  supply  of  a  commodity  include  what  is  in  the  hands  of 
th  ^.  consumer  ? 

10.  Which  buyers  in  a  market  cannot  buy? 

11.  Which  sellers  cannot  sell? 

12.  Why  do  many  summer  tourists  like  to  go  where  no  other  tourists 
have  gone? 

B 

1.  Make  a  list  of  goods  that  advanced  in  price  during  the  Great 
War  and  try  to  determine  how  these  advances  affected  production. 

2.  Attach  maximum  prices  to  five  articles  you  have  recently  pur- 
chased. 

a.  Compare  these  prices  with  the  prices  you  paid. 
h.  Determine    your   approximate   consumers'    surplus    on   each 
purchase. 

c.  Would  a  lower  price  have  caused  you  to  buy  more  of  any 

article  than  you  did  buy? 

d.  Did  you  feel  the  influence  of  other  buyers? 

3.  Give  examples  from  your  own  experience  or  observation  of  the 
four  possible  market  conditions. 

4.  Mention  the  names  of  any  articles  you  have  seen  sold  at  "cut 
prices."     Discuss  these  sales  under  the  following  heads : 

a.  Elasticity  of  demand. 

h.  Competition  among  sellers. 

c.  Competition  among  buyers. 

d.  Seasonableness. 

5.  How  has  your  refusal  to  buy  any  article  which  was  on  sale  affected 
the  market  price  of  that  article  ? 


DEMAND,   SUPPLY,   AND   PRICE 


65 


1.  During  the  winter  of  1918-19,  the  statement  was  often  made 
that  the  high  wages  per  ton  paid  to  miners  during  the  preceding  summer 
had  tended  to  decrease  rather  than  to  increase  the  production  of  coal. 

a.  Assuming  this  statement  to  be  correct : 
i.  Why  were  wages  increased? 

ii.  Why  did  not  an  increase  in  wages  increase  the  coal  output  ? 
iii.  Can  we  conclude  that  wages  vary  inversely  with  output? 
6.  Assuming  this  statement  to  be  incorrect : 
i.  What  caused  it  to  be  made  ? 
ii.  Why  did  many  people  believe  it  to  be  true  ? 
iii.  Why  was  it  not  refuted? 

2.  Analyze  the  medieval  notion  that  in  every  exchange  of  goods  one 
of  the  parties  to  the  exchange  lost  exactly  what  the  other  party  gained. 

3.  Explain  how  the  market  price  of  wheat  would  be  determined 
under  the  following  conditions  : 


Amount  Offered 

Price 

Amount  Demanded 

10,000,000  bu.      .     . 

.     .     $1.50        .     . 

.     .       3,000,000  bu. 

8,000,000  bu.      .     . 

.     .        1.25        .     . 

.     .       4,000,000  bu. 

7,000,000  bu.      .     . 

.     .        1.10    '    .     . 

.     .       5,000,000  bu. 

6,000,000  bu.      .     . 

.     .        1.00 

.     .       6,000,000  bu. 

3,000,000  bu.      .     . 

.80    '    .     . 

.     .       8,000,000  bu. 

1,000,000  bu.      .     . 

.60        .     . 

.     .     10,000,000  bu. 

a.  At  what  price  will  the  greatest  amount  be  bought  and  sold? 
h.  What  effect  will  the  market  price  have  on  consumption  of 
wheat?  on  future  production  of  wheat? 

4.  If  competitive  prices  are  determined  by  an  equilibrium  between 
demand  and  supply,  how  can  a  store  maintain  a  "one-price  system"? 

5.  "The  price  of  pork  has  never  gone  as  high  as  $2  a  pound  nor  as 
low  as  ten  cents  a  barrel." 

a.  Why  are  there  any  fluctuations  in  price? 

6.  Why  are  the  prices  higher  now  (1919)  than  ten  years  before? 

c.  Are  there  any  conditions  under  which  the  price  of  pork  might 

fluctuate  as  much  as  suggested  by  the  above  statement? 

d.  What  classes  of  people  would  buy  pork  if  it  were  $2  a  pound? 

What  would  other  classes  do? 


I 


66  ELEMENTARY   ECONOMICS 

6.    Suppose  at  potato-digging  time  a  gardener  finds  that  the  market 
price  of  potatoes  is  but  twenty  cents  a  bushel. 

a.  What  would  be  his  attitude  toward  storing  potatoes? 

b.  If  he  stored  his  potatoes  would  he  be  a  seller  in  the  market  ? 

Explain. 

c.  Suppose  he  had  no  facilities  for  storing : 

i.  Would  he  dig  his  potatoes  ?     Why,  or  why  not  ? 
ii.  Might  he  sell  them  undug?     How? 

d.  What  would  be  his  attitud-e  toward  the  next  crop  of  potatoes  ? 

e.  Suppose  he  turns  his  attention  to  wheat-raising  : 

i.  What  would  be  the  possible  effect  on  the  future  price  of 

potatoes  ? 
ii.  How  might  the  price  of  wheat  be  affected? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3(1  ed.,  pages  192-222. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  164-182. 

Fetter,  Economics,  Vol.  I,  pages  61-72. 

Fisher,  Elementary  Principles  of  Economics,  pages  268-353. 

Johnson,  Introduction  to  Economics,  pages  36-42. 

Seager,  Principles  of  Economics,  pages  109-122. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  222-238. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  138-158. 


I 


CHAPTER  VI 
SOME   PRACTICAL   ASPECTS    OF   CONSUMPTION 

15.  Harmful  Consumption 

Consumption  from  the  standpoint  of  economics.  —  Strictly 
speaking,  the  student  of  economics,  as  such,  must  confine  his 
attention  to  demands  for  goods,  however  much  as  an  individual 
he  may  deplore  the  manner  in  which  many  goods  are  produced 
and  the  evil  results  which  their  consumption  often  entails. 
A  suit  of  clothing  made  in  a  sweatshop  fills  the  same  need  as  a 
similar  one  turned  out  from  the  most  up-to-date  manufacturing 
plant.  Both  are  produced,  both  are  distributed  in  the  form  of 
money  among  those  who  assist  in  production,  both  are  con- 
sumed. Likewise,  a  box  of  cigars  is  just  as  much  an  object  of 
economic  inquiry  as  is  a  sack  of  flour,  though  society  would  be 
greatly  profited  by  an  increase  in  the  one  and  a  decrease  in  the 
other.  But  just  as  long  as  there  is  a  demand  for  cigars,  the 
student  of  economic  questions  must  include  them  in  his  in- 
vestigation. This  does  not  mean,  however,  that  we  should 
ignore  the  effects  of  the  production  or  consumption  of  any 
particular  good.  Rather  does  it  mean  that  we  should  study 
every  economic  demand  irrespective  of  its  evil  results  and  every 
effort  that  is  put  forth  to  supply  this  demand. 

Nature  of  harmful  consumption.  —  It  is  impossible,  we  may 
as  well  say  at  the  outset,  to  draw  a  line  through  consumption, 
marking  off,  on  the  one  side,  the  satisfactions  of  desires  that 
bring  nothing  but  an  increased  welfare  both  individual  and 
social,  and  on  the  other,  the  satisfactions  that  produce  the 

67 


68  ELEMENTARY   ECONOMICS 

opposite  effect.  Every  one  will  agree  that  bread  contributes  to 
our  well-being,  and  that  opium  does  not.  Yet  in  a  complete 
classification  of  goods  there  comes  a  time  when  disagreement 
will  appear,  when  even  learned  and  unbiased  authorities  will 
differ.  The  best  we  can  do  under  these  circumstances,  there- 
fore, is  to  weigh  the  facts  in  each  case,  both  as  individuals  and 
in  small  social  groups,  hoping  thereby  to  arrive  at  the  truth. 

It  is  obvious  that  a  considerable  portion  of  human  con- 
sumption is  unwise  and  even  actually  harmful.  Intemperance 
abounds  not  alone  in  the  consumption  of  such  positively  harm- 
ful goods  as  drugs  and  intoxicating  liquors.  Its  baneful  in- 
fluence extends  even  to  the  use  of  food,  of  clothing,  and  of  enter- 
tainment. Few  people  would  now  deny  that  the  use  of  drugs  or 
intoxicating  liquors  is  detrimental,  as  well  to  the  best  interests 
of  society  as  to  the  individual.  The  opinion  once  generally  held 
that  alcohol  increased  and  sustained  mental  and  physical  energy 
has  been  discarded.  Unfortunately,  the  great  majority  stop  at 
that  point  in  their  opposition  to  intemperance,  forgetting  that 
it  is  also  harmful  to  consume  intemperately  other  economic 
goods.  The  typical  American  is  much  more  Ukely  to  be  overfed 
than  underfed.  The  more  frugal  Europeans  often  marvel  at  our 
capacity  for  food,  while  many  a  physician  can  testify  that  his 
practice  consists  largely  in  doctoring  the  ailments  that  arise 
from  overeating.  Such  consumption,  we  may  safely  say,  is 
harmful  as  well  as  unwise.  Also  in  the  matter  of  dress  many 
of  us,  perhaps  a  majority,  protect  our  bodies  with  more  care 
than  nature  demands,  thereby  lowering  the  physical  vitality, 
instead  of  raising  it.  Entertainment,  too,  may  be  carried  to  an 
extreme,  particularly  that  kind  which  consists  of  late  hours, 
undue  excitement,  or  inactivity. 

Consuiription  and  eflaciency.  —  It  will  readily  be  seen  that  con- 
sumption is  an  important  factor  in  efficiency.  Large  industries 
clearly  recognize  this  fact ;   hence  their  insistence  on  sobriety 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION       69 

among  their  employees.  The  manager  of  many  a  large  indus- 
trial plant  views  the  week-end  with  horror,  knowing  from  expe- 
rience that  his  force  will  be  depleted  on  Monday  by  Sunday's 
carousals.  The  effects  of  these  excesses  are  too  obvious  to 
merit  discussion.  Other  excesses,  however,  not  so  easily  dis- 
cerned, or  if  discerned  allowed  to  go  unchallenged,  have  a 
similar  influence  on  the  industrial  efficiency  of  society.  Office 
workers,  students,  and  all  others  that  follow  a  sedentary  Hfe, 
often  fail  to  work  as  efficiently  as  they  might  if  they  took  more 
exercise  and  ate  less  food.  Who  has  not  experienced  the  languor 
that  comes  so  frequently  just  after  the  noonday  meal?  the 
fine  feeling  of  bodily  and  mental  energy  that  comes  with  an 
empty  stomach?  Efficiency  is  increased  also  by  keeping  the 
temperature  of  the  body  normal.  Overheated  rooms,  which 
means  an  overconsumption  of  fuel,  and  garments  too  thick 
and  heavy  for  the  occasion,  produce  depression  in  mind  arid 
body,  thereby  lessening  normal  efficiency. 

From  what  has  been  said  it  is  apparent  that  society  is  in- 
terested in  the  consumption  of  its  members  —  that  is,  that  it 
is  not  altogether  an  individual  matter  what  one  eats,  or  drinks, 
or  wears.  Already  steps  have  been  taken  to  discourage  the  use 
of  intoxicating  liquors,  not  alone  because  it  is  felt  that  their 
use  is  more  or  less  immoral,  but  also  because  it  has  been  proved 
beyond  dispute  that  alcohol  and  industrial  efficiency  do  not 
mix.  Further  than  this,  society  has  not  yet  attempted  to  go. 
Consequently  it  is  the  business  of  each  one  of  us  to  keep  fit 
mentally  and  physically  by  reUeving  the  mind  and  body  of  over- 
work in  combating  intemperance  of  every  sort. 

16.  Unwise  Consumption 

The  meaning  of  economical  consumption.  —  Another  type  of 
consumption,  which  in  itself  is  not  positively  harmful  to  the 
body  or  mind,   we   may  designate   as  unwise   consumption. 


70  ELEMENTARY   ECONOMICS 

Whenever  either  of  two  goods  is  capable  of  satisfying  a  want, 
obviously,  the  use  of  the  one  which  involves  the  greater  labor  to 
procure  is  unwise.  The-early  colonists,  and  later  the  frontiers- 
men in  the  West,  found  it  necessary  to  substitute  corn  for  wheat 
as  a  material  for  making  bread.  They  preferred  wheat  bread, 
but  their  good  sense  soon  taught  them  the  advantages  of  eating 
corn  bread  instead.  Here  is  an  example  of  economical  con- 
sumption. It  was  economical  for  the  simple  reason  that  corn 
was  easier  to  grow  than  wheat.  Some  of  the  early  settlers, 
however,  went  to  great  extremes  in  an  effort  to  satisfy  tastes 
which  they  had  acquired  in  Europe,  and  which  could  be  satisfied 
only  in  old  settled  countries.  They  planted  vineyards,  from 
which  they  expected  to  get,  in  a  short  time,  a  supply  of  wine 
sufficient  for  their  needs.  Almost  without  exception  their 
expectations  were  not  realized.  Consequently,  they  turned  to 
apple  cider  and  corn  whisky,  both  of  which  were  easily  produced 
on  the  frontier.  Modern  business  conditions  tend  to  lessen  the 
differences  in  value  between  two  goods  equally  serviceable, 
yet  even  today  there  is  need  to  compare  the  disadvantages 
arising  from  the  higher  price  of  one  good  with  the  disadvantages 
one  may  feel  in  having  to  adjust  his  taste  to  another  good  more 
easily  procured. 

The  gospel  of  plain  living.  —  Closely  related  to  economical 
consumption  is  plain  living.  At  the  very  outset  we  must  rob 
our  minds  of  any  feeling  that  plain  living  is  something  mean  or 
contemptible,  or  that  it  is  associated  with  poverty  or  want. 
On  the  contrary,  plain  living  is  the  real  basis  of  industrial 
efficiency,  of  education,  of  culture,  and  of  happiness.  It  begets 
contentment  of  mind,  adds  to  physical  energy,  and  prolongs 
life.  We  find  it  associated  with  achievement  in  every  line  of 
endeavor.  In  fact,  an  old  philosophy  made  plain  living  and  high 
thinking  the  only  sure  corner  stones  on  which  a  successful 
life  could  be  built. 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION       71 

The  most  superficial  observation  of  American  living  con- 
ditions reveals,  not  only  a  remarkable  degree  of  poor  taste  in 
consumption,  but  also  poor  judgment  as  to  the  relative  merits  of 
similar  goods.  Otherwise  there  would  not  be  the  widespread 
demand  for  the  study  of  home  economics.  Everjrwhere  serious- 
minded  men  and  women  are  coming  to  realize  that  incomes  are 
not  being  spent  to  the  best  advantage,  that  they  are  virtually 
being  thrown  away,  too  often  through  ignorance,  in  buying  goods 
that  satisfy  the  most  transitory  demands. 

Social  unrest.  —  Unwise  consumption  is  one  of  the  several 
causes  of  the  social  unrest  which  has  manifested  itself  in  this 
country  during  the  past  generation.  The  consuming  standards 
■  of  most  individuals  are  set  to  some  degree  by  neighbors  and 
friends.  In  a  democracy,  such  as  ours,  where  every  one  feels 
that  he  is  equal  to  every  one  else,  there  is  always  the  temptation 
to  display  equality  through  the  consumption  of  goods.  Conse- 
quently, many  people  live  beyond  their  income  in  a  fruitless 
endeavor,  as  they  say,  to  keep  up  appearances.  The  result  is 
debt,  worry,  and  discontentment.  Debt  keeps  out  of  their 
reach  business  opportunities  which  they  might  easily  have 

t grasped  had  they  lived  within  their  means.  Worry  destroys 
efficiency,  while  discontentment  causes  them  to  overlook  the 
small  things  which  would  in  time  lead  to  something  better. 
Here,  then,  is  an  important  source  of  social  unrest,  which  we 
can  counteract  and  finally  eliminate  by  having  a  proper  regard 
for  economic  values. 

It  would  be  misleading  to  close  this  discussion  without  sajdng 
something  more  about  the  sources  of  social  unrest.  The 
rapid  increase  in  the  number  of  wealthy  men,  the  display  of 
lavish  expenditures  on  every  hand,  and  the  concentration  of 
industry,  lead  many  to  believe  that  American  industrial 
society  needs  to  be  reconstructed  in  some  way  so  as  to  equalize 
more  even  y  the  distribution  of  wealth  and  to  place  in  the  hands 


72  ELEMENTARY   ECONOMICS 

of  the  workers  greater  control  over  production.  Further  dis- 
cussion along  these  lines,  however,  must  be  deferred  to  later 
chapters. 

17.   Conservation  and  Thrift 

The  sin  of  waste.  —  Americans  are  proverbially  the  greatest 
wasters  the  world  ever  saw.  It  is  a  common  expression  among 
European  travelers  in  this  country  that  a  frugal  French  house- 
wife could  easily  feed  her  family  with  the  food  wasted  in  a  well- 
to-do  American  home.  Granting  the  extravagances  of  such  a 
statement,  the  significant  fact  remains  that  only  a  relatively 
few  of  us  are  normally  thrifty.  Not  only  in  food,  which  may  be 
wasted  by  overeating  as  well  as  by  throwing  it  in  the  garbage 
barrel,  but  also  in  clothing,  in  house  furnishings,  and  in  a 
variety  of  different  ways,  we  fail  to  get  maximum  satisfaction 
from  our  consumption.  The  broken  pieces  of  bread,  left-over 
vegetables,  and  bits  of  meat,  which  are  toa  often  thrown  away, 
might  very  well,  if  sensibly  and  properly  prepared,  serve  as  the 
basis  of  another  meal.  Likewise,  the  overcoat,  discarded  after 
a  season's  wear,  or  the  shoes  thrown  away  simply  because  they 
need  a  new  pair  of  soles,  represent  waste  which  might  otherwise 
be  utilized  to  the  advantage  of  society  as  well  as  of  the  in- 
dividual. 

Any  discussion  of  waste  must  necessarily  involve  two  con- 
flicting viewpoints :  that  of  society,  which  suffers  a  loss ;  and 
that  of  those  individuals  who  reap  a  profit  from  waste.  Clearly, 
the  cattle-raiser,  as  such,  is  profited  by  the  waste  of  meat.  The 
manufacturers  ,and  retailers  of  men's  clothing  likewise  profit 
by  a  waste  of  hats,  overcoats,  and -furnishings.  Not  one  of 
these  men  perhaps  would  openly  encourage  waste  of  any  sort, 
and  it  is  only  fair  to  them  to  say  that  they  see  no  waste  when  the 
goods  they  themselves  sell  are  concerned.  Society,  however, 
must   view  the  whole   field  and  not  a  particular   industry, 


I 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION       73 

though  this  view  should  be  detrimental  to  individual  enter- 
prises. The  country  as  a  whole  experienced  during  the  first  year 
of  our  war  with  the  Central  Powers  this  conflict  between  indi- 
vidual and  social  aims  in  the  matter  of  waste.  The  government 
called  for  millions  of  men  and  billions  of  dollars  which  could  be 
supplied  only  from  the  non-war  industries.  The  answer  was 
''  business  as  usual,"  which  from  the  social  point  of  view  was 
impossible.  Individual  business  men  set  up  claims  that  the 
ends  of  war  could  be  furthered  by  buying  their  goods.  Finally, 
such  claims  became  absurd.  Even  florists  in  some  sections 
adopted  the  slog'an,  "  give  flowers  and  win  the  war,"  while 
theatrical  managers  everywhere  insisted  that  the  morale  of  the 
people  demanded  an  increased  attendance  at  vaudeville  and 
motion-picture  shows. 

The  twofold  aspect  of  thrift.  —  The  practice  of  thrift  may 
result  in  a  twofold  benefit.  First,  the  individual  is  sure  to  profit 
if  he  does  not  permit  his  thrift  to  degenerate  into  parsimony. 
The  very  spirit  of  wholesome  saving  stimulates  sobriety,  tem- 
perance, efficiency,  and  contentment.  It  creates  a  feeling  of 
independence,  tends  to  guard  against  accidental  reverses,  and 
provides  for  old  age.  Not  less  important,  it  makes  the  saver  a 
better  citizen,  giving  him  an  interest  in  society  and  government 
which  he  cannot  have  if  he  spends  every  dollar  as  it  comes  in. 
It  is  a  well-known  fact  that  a  city  of  home-owners  is  likely  to  be 
a  city  of  enterprise,  of  good  government,  and  of  good  schools 
and  churches.  Back  of  all  this  lies  the  willingness  of  the  in- 
dividual to  save.  Second,  society  is  also  the  gainer  in  the  long 
run,  though  individual  producers  would  feel  the  pinch  of  a 
decreased  demand  for  their  goods.  But  even  they  in  time  would 
as  a  class  adjust  themselves  to  the  new  condition.  Society 
would,  if  thrift  prevailed,  possess  not  only  more  efficient  and 
more  contented  members,  but  also  a  greater  supply  of  wealth 
to  be  used  in  productive  enterprises.     No  real  sacrifice,  it 


74  ELEMENTARY   ECONOMICS 

must  be  said,  is  involved,  either  from  an  individual  or  a  social 
standpoint,  in  an  increase  of  thrift.  It  makes  no  demand  that 
the  individual  shall  forego  any  necessity  or  even  comfort. 
It  does,  however,  stand  for  sensible  consumption,  for  a  judicious 
comparison  of  values,  and  for  the  elimination  of  waste. 

Some  avenues  for  saving.  —  Thrift,  we  have  every  reason 
to  expect,  would  be  stimulated  by  a  better  understanding  of  the 
avenues  through  which  savings  can  be  made.  The  most  out- 
standing institution  in  this  respect  is  the  savings  bank,  which 
readily  accepts  small  amounts,  paying  depositors  a  reasonable 
rate  of  interest,  usually  in  the  neighborhood  of  three  or  four  per 
cent.  Even  the  national  government  has  entered  this  field 
with  its  postal  savings  bank  system.  A  much  higher  rate  of 
interest  can  be  got  from  stock  in  building  and  loan  associations. 
Unlike  deposits  in  savings  banks,  which  can  be  made  in  any 
amount  at  any  time,  building  and  loan  dues  are  payable  at 
stated  times  in  stated  amounts.  This  very  characteristic,  the 
definiteness  in  time  and  amount,  though  it  is  galling  to  many 
people,  works  effectively  to  create  habits  of  thrift  and  saving. 
What  at  first  appears  to  be  a  burden,  soon,  by  the  very  force  of 
habit,  becomes  a  fixed  charge  against  income,  which  is  handled 
exactly  like  rent  or  regular  store  bills.  Small  accumulations 
like  these  are  first  steps  to  larger  investments.  Periodically 
the  savings  bank  depositor  or  the  owner  of  building  and  loan 
shares  is  able  to  buy  government  or  industrial  bonds  or  even 
real  estate  mortgages.  The  interest  from  these  larger  invest- 
ments becomes  the  nucleus  of  further  savings,  which  in  time 
ripen,  as  it  were,  ^  into  more  bonds  or  mortgages.  Thus,  the 
process  goes  on  until  in  time  many  a  man  finds  himself  in 
possession  of  a  greater  income  from  his  savings  than  he  can 
possibly  get  from  his  labor.  The  hardest  part  of  saving,  as  any 
successful  man  will  testify,  is  the  beginning.  A  dollar  appears 
too  insignificant  to  be  saved.     Besides,  there  are  so  many  things 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION       75 


its  possessor  feels  that  he  ought  to  buy.     But  with  foresight  and 
a  spirit  of  abstinence  the  typical  American  can  save. 

As  a  practical  problem  saving  seldom  appeals  to  young  people 
of  high  school  and  college  age.     Yet  of  all  classes  they  ought  to 


Investment 

Investment 

Inter- 
est in 
Five 
Years 

Investment 

Interest  in 
Ten  Years 

Investment 

Interest  in 
Fifteen  Years 

Investment 

Interest  in  Twenty  Years 

Investment 

Interest  in  Twenty-five  Years 

Growth  of  an  Investment  Compounded  Annually  at  Six  Per  Cent. 

[acquire  the  habit,  for  a  dollar  saved  at  twenty  is  worth  several 
[dollars  saved  at  forty.  Early  savings  mean  an  early  start  in 
business,  early  home-owning,  and  early  independence.  A  first- 
year  high  school  boy  who  can  begin  to  put  five  dollars  a  month 
into  a  building  and  loan  association  will,  in  the  middle  of  his 
junior  year  in  college,  find  himself  in  possession  of  five  hundred 
dollars.  Likewise  the  high  school  graduate  who  is  about  to  take 
;his  first  step  into  the  business  world  can,  by  investing  ten  dollars 
a  month  in  the  same  way,  have  a  thousand  dollars  at  the  age  of 
twenty-five.  The  saving  problem  becomes  easy,  to  repeat  what 
has  already  been  said,  after  the  first  step  has  been  taken. 


76  ELEMENTARY   ECONOMICS 

Report  of  the  Peoples  Building  and  Loan  Association, 
April  1,  1919 

Assets 

Loans  on  Real  Estate      1  $418  100  00 
Loans  on  Stock  Pledged  J 

Interest  due  and  unpaid 475.06 

Fines  due  and  unpaid 96.90 

Installments  due  and  unpaid 837.00 

Real  Estate        :  ^.  4,197.97 

Judgments  or  Master's  Certificates  ....  6,445.07 

Real  Estate  Sold  on  Contracts 1,231.00 

Taxes  advanced 174.89 

Insurance  advanced         ........  19.08 

Furniture  and  Stationery 400.00 

Cash  in  hands  of  Treasurer 102.66 

Cash  in  hands  of  Secretary      .     .     .     r     .     .  176.90 

$432,256.53 

Receipts 

Cash  in  Treasury $233.25 

Cash  in  hands  of  Secretary      .     .     .     .     .     .  24.44 

Installments  received      ........  108,909.75 

Interest  received 31,884.52 

Membership  Fees  received 77.00 

Transfer  Fees  received 17.50 

Fines  received 478.50 

Pass  Book  Fees  received 45.00 

Loans  repaid  or  matured 103,600.00 

Taxes  repaid 408.49 

Insurance  Premiums  repaid 67.70 

Real  Estate 242.00 

Judgments 1,612.73 

Real  Estate  sold  on  Contract       316.75 

Contingent  Fund 268.00 

Installment  Suspense 28.75 

Expense  Fees 447.72 

Accounts  payable       .........  158,900.00 

$407,562.10 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION       77 

Report  of  the  Peoples  Building  and  Loan  Association, 
April  1,  1919 

Liahilities 

Installments  paid  in        $299,829.00 

Installments  paid  in  advance 185.00 

Installments  due  and  unpaid 837.00 

Interest  paid  in  advance 15.77 

Interest 1,857.78 

Profit  (divided) 50,184.93    . 

Profit  (undivided) .30 

Installment  Suspense 28.75 

Accounts  payable 76,050.00 

CojfTiNGENT  Fund 3,268.00 

$432,256.53 


Disbursements 

Loans  on  Real  Estate      \  $  Q3  000  00 

Loans  on  Stock  Pledged  / '       *     ' 

Installments  on  Stk.  withdrawn  and  matured  104,650.75 

Interest  or  Profit  on  Stock  withdrawn  .     .     .  25,582.67 

Real  Estate  . 254.14 

Judgments  or  Master's  Certificates       .     .     .  5,135.95 

Taxes  advanced 86.74 

Insurance  advanced   .........  58.38 

Accounts  payable       170,800.00 

Interest 5,454.88 

Expenses  —  general 408.92 

Expenses  —  salaries 1,500.00 

Stationery,  postage,  and  printing      ....  82.09 

Cash  in  hands  of  Treasurer 102,66 

Cash  in  hands  of  Secretary 176.90 

Miscellaneous  Disbursements 268.02 

$407,562.10 


78 


ELEMENTARY   ECONOMICS 


Table  of  Values  and  Shares 


Series 

Dues  Paid 

Profits 

Value  Per  Share 

25-A 

$72.00 

$18.40 

$90.40 

26-A 

60.00 

12.78 

72.78 

27-A 

48.00 

8.18 

56.18 

28-A 

36.00 

4.60 

40.60 

29-A 

30.00 

3.20 

33.20 

30-A 

24.00 

2.04 

26.04 

31-A 

18.00 

1.15 

19.15 

32-A 

12.00 

.51 

12.51 

33-A 

6.00 

.13 

6.13 

1-B 

15.00 

1.60 

16.60 

2-B 

12.00 

1.02 

13.02 

3-B 

9.00 

.57 

9.57 

4-B 

6.00 

.26 

6.26 

5-B 

3.00 

.06 

3.06 

18.   Substitution 

Force  of  habit  in  consumption.  —  Very  naturally  one  of  the 
first  points  where  thrift  begins  is  the  substitution  of  one  good 
for  another.  Strongly  opposed,  however,  to  substitution  — 
or  to  any  other  change  —  is  the  force  of  habit.  Alt  of  us  con- 
sume goods  daily  without  giving  second  thought  to  the  needs 
we  feel,  or  to  the  satisfaction  we  secure.  It  is  true  that  if  such 
goods  were  entirely  removed  we  should  feel  their  absence  and 
even  complain  of  privation.  Yet  if  some  other  good  of  like 
appearance  were  substituted  we  should  not,  in  many  cases, 
detect  the  deception.  People  become  accustomed  to  use,  for 
example,  creamery  butter,  lard,  pure  apple  cider,  leather  shoes, 
or  solid  silverware,  and  feel  that  nothing  else  could  serve  so 
well  the  purpose  to  which  these  goods  are  put.  The  basis  for 
these  wants  goes  scarcely  deeper  than  taste  or  looks,  for  seldom 
if  ever  do  we  stop  to  analyze  the  satisfaction  of  deeper  wants, 
such  as  cleanliness,  comfort,  or  good  health. 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION        79 

Extent  of  substitution.  —  The  rise  in  prices  which  began 
about  1896  and  which  was  accelerated  by  the  Great  War 
naturally  turned  the  attention  of  both  producers  and  consumers 
to  the  question  of  substitutes.  The  result  has  been  that  many 
goods  have  been  compelled  to  compete  with  substitutes.  At 
times  the  battle  between  the  two  has  become  intense.  Butter 
and  oleomargarine,  for  example,  have  contested  for  supremacy, 
the  producers  of  each  basing  their  claims  for  preference  on 
uniformity  in  texture,  cleanliness,  and  nutrition.  In  support 
of  what  was  said  in  the  preceding  paragraph,  the  fact  may  be 
cited  that  tons  of  the  latter  have  been  consumed  by  hotel  and 
restaurant  patrons  who,  if  they  were  questioned  in  the  matter, 
would  have  declared  their  inability  to  eat  any  substitute  for 
butter.  Substitutes  have  been  found  for  many  other  foods,  such 
as  wheat  bread,  ohve  oil,  maple  sirup,  and  eggs.  Likewise, 
substitutes  for  numerous  other  kinds  of  goods  have  been 
discovered,  until  one  scarcely  knows  just  when  he  is  buying 
leather,  silk,  cloth,  furs,  paints,  or  oils. 

Merit  in  substitution.  —  The  first  feeling  toward  substitution 
is  that  it  is  more  or  less  of  a  fraud,  and  that  no  substitute  can 
possibly  possess  the  merits  possessed  by  the  good  it  attempts  to 
displace.  Obviously,  no  such  sweeping  conclusion  can  be  justly 
drawn,  for  until  a  careful  comparison  of  the  utilities  yielded 
by  two  competing  goods  is  made,  no  one  can  say  which  is  the 
better  either  from  the  individual  or  from  the  social  standpoint. 
We  can  conclude,  however,  that  as  between  the  two,  all  other 
things  being  equal,  the  cheaper  is  preferred. 


80  ELEMENTARY   ECONOMICS 

EXERCISES  AND   PROBLEMS 
A 

1.  What  is  the  economic  viewpoint  of  consumption? 

2.  How  does  this  viewpoint  differ  from  the  ethical  viewpoint? 

3.  How  is  consumption  related  to  industrial  efficiency  ? 

4.  Distinguish  between  unwise  consumption  and  harmful  consump- 
t'on. 

5.  What  are  some  of  the  motives  that  lead  to  unwise  consumption? 
harmful  consumption  ? 

6.  Why  does  the  saving  problem  become  easy  after  the  first  step? 

7.  How  does  substitution  encourage  thrift? 

8.  Distinguish  between  the  social  and  the  individual  viewpoint  of 
waste. 

9.  What  is  the  relation  between  plain  living  and  high  thinking? 


1.  Msbke  a  list  of  ten  articles  the  consumption  of  which  is  harmful. 
a.  Would  each  be  harmful  at  all  times  ? 

h.  Would  each  be  harmful  to  all  persons  at  any  time? 

c.  Which,   if    any,  become  harmful    only  with  excessive  con- 

sumption ? 

d.  Would  everybody  agree  with  your  list? 

2.  Mention  ten  instances  of  waste  that  have  come  under  your 
observation. 

a.  How  many  of  the  ten  were  conscious  wastes?     How  many 

unconscious  ? 
h.  How  could  these  wastes  have  been  avoided? 

c.  Were   any    of    these   wastes   beneficial    to    any   individual? 

Whom? 

d.  Were  any  of  them  beneficial  to  society  ?     Explain. 

3.  Suppose  you  begin  now  to  save  ten  dollars  a  month,  investing 
it  in  building  and  loan  stock  at  seven  per  cent. 

a.  In  how  many  years  would  your  stock  be  worth  $1000? 
6.  How  could  you  invest  this  amount  to  an  advantage? 
c.   How  many  times  could  you  repeat  this  operation  before  you 
are  fifty  years  of  age? 


SOME   PRACTICAL  ASPECTS   OF   CONSUMPTION       81 

d.  What  would  then  be  the  total  value  of  your  investment  ? 

e.  Is  this  amount  more  or  less  than  the  total  wealth  of  the  average 

well-to-do  individual  at  that  age? 
Make  a  list  of  food  substitutions. 

a.  Why  are  these  substitutions  consumed? 

b.  Which  are  less  palatable  than  the  foods  for  which  they  are 

substituted  ? 

c.  Is  there  any  popular  prejudice   against  any  of  these  sub- 

stitutes? 

d.  How,  if  at  aU,  is  this  prejudice  being  destroyed  ? 


1.  In  discussions  of  the  liquor  business,  what  is  the  essential  differ- 
ence between  temperance  and  prohibition?  How  could  an  individual 
support  one  without  supporting  the  other  ?  Which  of  the  two  is  more 
intimately  connected  with  government  regulation?  with  moral  educa- 
tion? 

2.  A  few-  years  ago  a  large  manufacturing  concern  established  its 
pay  days  on  Wednesdays.  Shortly  afterward  it  changed  back  to 
Saturdays.     Give  reasons  for  the  last  change. 

3.  A  farmer  usually  consumes  much  more  food  than  a  man  living 
in  the  city.  Does  this  mean  that  the  farmer  is  overeating  or  that  the 
city  man  is  undereating?  How,  then,  shall  we  determine  how  much 
food  is  sufficient  for  any  individual  ? 

4.  "Americans  grumble  at  the  high  cost  of  living.  If  they  would 
look  about  they  would  see  that  a  much  greater  evil  is  the*  cost  of  high 
living." 

a.  Has  there  been  an  increase  in  the  cost  of  living? 

h.  What  is  meant  by  the  expression  "cost  of  high  living"? 

c.   Is  there  any  relation  between  the  two? 

5.  "Americans  are  notorious  spendthrifts.  European  shopkeepers 
have  three  prices  for  their  goods :  one  for  their  native  customers  in 
moderate  circumstances;  another  for  native  millionaires;  and  the 
highest  for  American  tourists." 

o.  Why  is  the  typical  American  liberal  with  his  money? 

6.  What  is  the  general  notion  about  one  who  spends  his  money 

with  care  ? 
c.  Account  for  the  prevalence  of  the  tipping  habit  in  this  country. 


82  •       ELEMENTARY   ECONOMICS 


SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  107-113. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  122,  123,  497-500. 
Fetter,  Economics,  Vol.  I,  pages  285-299. 
Johnson,  Introduction  to  Economics,  pages  197-199. 
Seager,  Principles  of  Economics,  pages  83,  316-321. 
Taussig,  Principles  of  Economics,  2d  ed..  Vol.  I,  pages  90-92,  Vol.  II, 
pages  16-21. 


PART  III 

PROBLEMS  OP  PRODUCTION 


CHAPTER  VII 

ORGANIZATION    OF   INDUSTRY 

19.  Historical  Background 

The  domestic  system.  —  Until  less  than  two  hundred  years 
ago  practically  all  of  the  productive  processes  were  carried 
on  in  the  homes,  either  by  hand  or  with  the  aid  of  crude  tools 
and  machinery  which  showed  little  improvement  over  those 
employed  in  the  Middle  Ages.  Weaving,  the  chief  manufactur- 
ing industry  in  England  at  that  time,  was  done  by  men,  like 
Silas  Mamer,  who  gave  it  their  entire  attention,  or  by  the 
peasant  farmers  and  their  families,  who  combined  weaving 
with  agriculture.  At  one  time  the  typical  weaver  bought  his 
thread  in  the  market  and  there  he  also  disposed  of  his  cloth. 
Later,  so-called  capitalists  furnished  thread  to  weavers  and 
paid  them  for  their  labor,  sometimes  even  supplying  them  with 
looms.  Gradually,  then,  there  began  to  emerge,  in  addition  to 
the  independent  weavers,  two  classes  of  producers :  one  owned 
a  portion  or  all  of  the  capital  invested ;  the  other  class  did  the 
weaving.  Iron-smelting,  machine-making,  the  manufacture  of 
shoes,  clothing,  and  hats,  and  practically  every  other  form  of 
production  was  carried  on  in  a  similar  manner.  The  important 
thing  to  notice  in  this  connection  is  the  rise  of  a  capitaUst  class 
which  undertook  to  supply  workmen  with  raw  materials  and 
machines  and  to  dispose  of  the  finished  product. 

The  English  industrial  revolution.  —  Beginning  about  1760, 
with  the  invention  of  improved  spinning  and  weaving  machines 

85 


86  ELEMENTARY   ECONOMICS 

and  with  the  successful  appUcation  of  steam  to  machinery, 
EngUsh  industry  soon  underwent  radical  changes.  Home 
manufactures  gave  way  to  the  factory  system  with  its  hum  and 
noise,  its  long  and  steady  hours,  its  discipline,  and  its  deadening 
influence.  The  old-type  capitalists  became  owners.  The 
independent  weavers  and  spinners  became  operatives,  being 
compelled  as  a  result  of  the  change  to  leave  their  little  plots 
of  land  with  their  gardens,  poultry,  and  hogs,  and  to  crowd 
about  the  factories  in  poorly  built  hovels.  A  similar  change  took 
place  in  all  other  lines  of  manufacturing.  Workers  gave  up 
their  tools  and  machines,  and  whatever  hereditary  rights  they 
had  in  the  land,  thus  cutting  themselves  off  from  a  great  deal 
of  their  traditional  independence. 

The  American  industrial  revolution.  — Fifty  years  later  (1810) 
the  American  industrial  revolution  was  under  way.  Samuel 
Slater,  twenty  years  before,  had  introduced  the  factory  system 
into  the  United  States.  The  repressive  commercial  measures  of 
Great  Britain  in  her  Orders  in  Council  (1806  and  1807)  and  the 
edicts  of  Napoleon  (1806  and  1807)  had  turned  enormous  quan- 
tities of  American  capital  and  thousands  of  laborers  from  com- 
merce and  agriculture  to  manufactures.  Our  own  Embargo 
Act  (1807)  and  Non-Intercourse  Act  (1809)  had  practically 
completed  what  the  two  great  European  powers  had  begun  — 
the  industrial  isolation  of  the  United  States.  The  three  years^ 
war  with  Great  Britain  (1812-1814)  further  encouraged  manu- 
factures by  providing  them  a  government  market.  Thus,  by 
1816,  when  the  first  tariff  law  for  the  protection  of  American 
manufacturers  was  enacted,  the  American  industrial  revolution 
was  an  established  fact.  In  comparing  these  two  great  indus- 
trial revolutions,  it  must  be  kept  clearly  in  mind  that  the  one 
in  England  was  characterized  by  a  change  from  home  to  factory 
methods,  while  the  one  in  the  United  States  was  characterized 
by  a  change  from  commerce  and  agriculture  to  manufacturing. 


ORGANIZATION    OF   INDUSTRY  87 

Later  developments  in  manufactures.  —  Both  in  England  and 
in  the  United  States  the  factory  system  spread  until  in  time  it 
characterized  all  forms  of  production.  Home  manufacture  in 
either  of  these  countries  at  the  present  time  is  a  rarity.  Practi- 
cally every  manufactured  good  we  consume  comes  from  some 
factory.  Along  with  the  factory  system  went  the  development 
of  division  of  labor.  From  the  first  simple  English  weaving 
mills  in  which  each  operative  carried  on  all  the  processes  from 
the  thread  to  the  finished  cloth,  we  have  finally  arrived  at 
the  place  where  each  operative  devotes  himself  to  one  specific, 
simple  task.  Consequently,  he  becomes  a  specialist  in  a  short 
time.  Our  chief  concern  in  this  connection  is  to  remember  that 
the  growth  and  spread  of  the  factory  system  has  been  largely 
responsible  for  important  changes  in  business  organization. 

Railroad  development.  —  Railroads,  like  manufactures,  have 
undergone  important  changes  since  the  first  line  in  the  United 
States  was  opened  for  business  in  1830.  Originally  projected 
as  local  enterprises  with  local  capital,  they  gradually  became 
national  in  character  and  in  service.  Further  consolidation 
and  extension  transformed  them  into  great,  through  trunk  lines, 
each  line  embracing  thousands  of  miles  and  employing  tens  of 
thousands  of  workmen.  Here  again  our  chief  interest  lies  in 
the  faqt  that  these  developments  have  shaped,  to  a  large  extent, 
our  methods  and  forms  of  business  organization. 

Developments  in  American  agriculture.  —  Unlike  manu- 
•factures  and  transportation,  agriculture  has  undergone  no 
radical  changes  in  the  matter  of  organization.  Now,  as  has 
been  the  case  for  centuries,  the  typical  farmer  operates  a  single 
farm  largely  with  his  own  labor  and  that  of  his  family.  He 
assumes  all  the  business  risks  and  enjoys  all  the  profits.  There 
have,  however,  been  three  developments  in  our  agriculture 
which  we  must  notice  at  this  point.  First,  farmers  produce 
more  for  the  markets  than  they  formerly  did,  selling  their 


88  ELEMENTARY   ECONOMICS 

products  for  money  and  buying  goods  which  their  predecessors 
had  produced  on  the  land  and  in  the  home.  Along  with  this 
change  has  gone  a  growth  of  specialized  farming  in  which  each 
farmer  concentrates  on  a  few  crops.  Second,  the  invention 
and  improvement  of  farm  machinery  has  set  free  multitudes  of 
laborers  for  other  industries.  Third,  there  has  been  a  significant 
increase  in  the  number  of  farm  operators  known  as  tenants,  who, 
as  the  term  signifies,  do  not  own  the  land  they  operate. 

20.   The  Single  Enterpriser  and  the  Partnership 

Place  of  the  single  enterpriser  in  production.  —  The  organi- 
zation of  a  productive  industry  may  take  any  one  of  three 
different  forms :  the  single  enterpriser,  the  partnership,  the 
corporation.  Each  possesses  advantages  as  well  as  disadvan- 
tages. Usually  one  of  the  three  is  better  adapted  than  either 
of  the  others  to  this  or  to  that  industry,  depending  on  its 
size,  on  the  nature  of  its  product,  or  on  the  character  of  its 
operations.  We  cannot  say,  therefore,  which  form  of  organi- 
zation is  best  adapted  to  any  particular  industry  until  we  know 
something  about  its  character.  We  can,  however,  without 
special  reference  to  particular  industries,  point  out  the  advan- 
tages and  disadvantages  of  each  form  of  organization  and 
draw  general  conclusions  as  to  their  adaptability. 

The  single-enterprise  form  of  industry  predominates  in  most 
lines  of  production.  It  has  almost  a  complete  monopoly  in 
farming,  it  is  the  form  most  often  met  in  retailing,  and  it  still 
holds  an  important  place  in  manufactures.  Wherever  small 
capital  is  sufficient  and  close  supervision  is  required,  we  may 
expect  to, find  a  single  enterpriser,  who  assumes  all  the  risks  of 
the  business  and  enjoys  all  of  its  profits.  Obviously,  he  controls 
his  business  alone  and  without  interference.  He  can  decide 
on  policies  and  carry  them  out  without  consulting  others. 
Thus,  we  can  see  why  farming,  retailing,  and  even  manufacturing 


ORGANIZATION   OF   INDUSTRY  89 

are  adapted  to  the  single-enterprise  form  of  organization.  Few 
farmers  would  care  to  share  the  cultivation  of  a  piece  of  land 
with  others.  Neither  does  the  druggist,  the  grocer,  or  the 
confectioner  ordinarily  feel  the  need  of  dividing  responsibility 
or  profits  with  some  one  else. 

Advantages  and  disadvantages  of  the  partnership.  —  A  part- 
nership, to  be  brief,  is  nothing  more  than  a  mutual  agreement 
between  two  or  more  individuals  to  undertake  an  enterprise. 
In  business  such  an  agreement  is  usually  confined  to  production. 
Compared  with  the  single  enterpriser  the  partnership  is  at  a 
disadvantage  in  the  matter  of  business  policy  and  authority. 
Unlike  a  single  enterpriser,  the  member  of  a  partnership  must 
share  more  or  less  authority  with  others.  Consequently,  as 
often  happens,  the  partners  work  at  cross  purposes,  one  advo- 
cating one  business  policy,  a  second  advocating  a  different 
pohcy,  while  a  third  partner  may  disagree  with  both  policies. 
Oftentimes,  under  such  circumstances,  it  is  found  desirable  to 
dissolve  the  partnership,  it  being  necessary  for  the  parties 
to  agree  mutually  on  some  plan  of  dissolution.  Profits,  which 
the  single  enterpriser  enjoys  alone,  must  be  divided  among  the 
partners.  This  division  is  made  on  the  basis  set  forth  in 
the  agreements  which  partners  usually  make  when  the  partner- 
ship is  formed. 

The  mere  fact  that  authority  and  profits  must  be  divided 
among  partners  is  not  in  any  way  indicative  that  partnerships 
are  not  necessary  and  profitable.  We  can  easily  imagine  a 
situation  where  men  desire  to  share  authority  with  others,  and 
where  the  profits  going  to  each  partner  exceed  what  any  one 
of  them  could  possibly  make  in  the  same  business.  The  old 
adage  that  ''two  heads  are  better  than  one  "  applies  very  well 
to  the  typical  partnership.  In  the  retail  business,  for  example, 
one  partner  may  possess  special  skill  as  a  buyer  of  goods, 
another  may  be  an  exceptionally  good  organizer  of  hired  help, 


90  ELEMENTARY   ECONOMICS 

while  a  third  may  have  marked  abiHty  in  handhng  the  finances 
of  the  business.  Sometimes  one  partner  merely  furnishes  the 
capital,  taking  no  active  part  in  the  direction  of  affairs.  Such  a 
one  is  usually  called  a  "  silent  partner."  We  may  conclude, 
then,  that  a  partnership  offers  advantages  in  at  least  two  ways. 
First,  it  permits  men  possessing  different  kinds  of  abilities  to 
unite,  thereby  increasing  efficiency.  Second,  it  makes  possible 
the  employment  of  larger  capital,  which,  as  we  shall  see  later, 
contributes  to  increased  production. 

21.   The  Corporate  Form  of  Organization 

Nature  of  the  corporation.  —  The  corporation  was  the  last 
of  the  three  forms  of  organization  to  develop ;  and  it  developed 
only  when  single  enterprisers  and  partnerships  found  that  they 
could  not,  usually  on  account  of  insufficient  capital,  carry  on 
certain  kinds  of  industry  to  the  best  advantage.  The  govern- 
ment then  stepped  in  and  created  artificial  persons,  which  we 
know  as  corporations.  The  corporation,  while  it  possesses 
many  characteristics  of  a  natural  person,  such  as  the  ability  to 
make  contracts  and  to  sue  in  the  courts,  has  certain  distinctive 
characteristics  of  its  own.  Its  life  is  either  limited  to  a  specific 
number  of  years,  or  it  is  definitely  unlimited,  there  being  no 
uncertainty  as  in  the  case  of  a  natural  person.  Its  business 
operations  are  restricted  to  the  purposes  for*  which  it  was 
organized,  and  these  purposes  are  stated  specifically  in  its 
charter.  Ordinarily,  the  maimer  in  which  it  carries  on  its 
business,  such  as  its  methods  of  bookkeeping,  is  subject  to 
more  or  less  regulation  by  the  government.  The  owners  of  a 
corporation  are  known  as  stockholders,  who  regularly  elect  a 
small  number  of  directors  from  their  ranks  to  manage  the  busi- 
ness. The  directors  in  turn  elect  the  president,  secretary, 
treasurer,  and  other  officers,  to  whom  they  usually  delegate  the 
actual  management  of  affairs. 


ORGANIZATION   OF   INDUSTRY 


91 


Advantages  and  disadvantages  of  the  corporate  form  of 
organization.  —  The  corporate  form  of  organization  has  an 
advantage  over  its  two  rivals  in  at  least  three  respects :  (1) 
it  diffuses  financial  responsibility,  (2)  it  survives  the  death 
of  its  owners,  and  (3)  it  permits  of  larger  accumulations  of 


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capital.  A  single  enterpriser,  as  we  have  seen,  must  assume 
all  of  the  financial  risks  of  his  business.  Likewise,  in  a  part- 
nership each  partner  is  financially  liable  for  the  entire  in- 
debtedness of  the  partnership.     For  that  reason  few  persons, 


92  ELEMENTARY   ECONOMICS 

unless  they  can  assist  directly  in  managing  its  affairs,  care 
to  assume  the  financial  responsibilities  which  a  partnership 
imposes.  In  a  corporation,  however,  the  situation  is  different. 
There  each  stockholder  is  ordinarily  liable  only  for  the  stock 
he  owns ;  that  is,  he  cannot  be  held  for  the  debts  of  the  cor- 
poration. In  other  words,  his  liability  to  loss  is  confined  to 
the  investment  he  has  already  made.  Moreover,  the  death  of  a 
stockholder  does  not,  as  in  the  partnership,  dissolve  the  organi- 
zation of  which  he  is  part  owner.  Consequently,  many  men 
who  could  not  or  would  not  become  either  single  enterprisers 
or  partners  are  easily  persuaded  to  become  stockholders  in 
corporations.  The  result  is  the  much  larger  accumulation  of 
capital  than  otherwise  would  be  possible. 

Stockholders  and  bondholders.  —  Strictly  speaking,  stock- 
holders are  enterprisers ;  that  is,  they  are  the  individuals  who 
assume  the  risks  of  business  and  enjoy  the  profits  of  their 
enterprise.  In  other  words,  they  are  the  owners.  The  ev- 
idence of  ownership  in  any  corporation  is  the  stock  certificate, 
which  bears  on  its  face  three  important  facts :  (1)  name  of  the 
owner,  (2)  number  of  shares,  (3)  par  value  of  each  share.  Many 
corporations  issue  two  kinds  of  stock,  preferred  and  common. 
Preferred  stock  bears  a  definite  dividend  rate,  which,  so  far  as 
the  corporation  may  be  able,  is  guaranteed.  It  may  also  carry 
a  preference  in  voting  or  in  the  division  of  assets,  should  the 
corporation  decide  to  liquidate.  Common  stock,  on  the  other 
hand,  yields  its  owner  dividends  only  after  dividends  have 
been  paid  on  the  preferred  stock.  To  state  the  same  fact  in 
another  way,  the  owners  of  common  stock  get  all  the  profits  over 
and  above  the  amount  necessary  to  pay  dividends  on  preferred 
stock.  Here  we  find  the  explanation  for  the  wide  variation  in 
the  value  of  many  common  stocks.  When  a  corporation  is 
merely  able  to  pay  its  preferred  dividends  the  value  of  its 
common  stock    ordinarily    drops    very  low.     When,   on   the 


ORGANIZATION   OF   INDUSTRY  93 

other  hand,  the  same  corporation  is  exceedingly  prosperous  the 
same  common  stocks  rise  in  value,  often  selling  for  more  than 
preferred  stocks.  If,  to  illustrate  the  case,  a  corporation  which 
has  equal  amounts  of  preferred  and  common  stocks  should  earn 
but  seven  per  cent,  which  is  a  normal  rate,  on  its  entire  capitali- 
zation, it  is  likely  that  its  common  stock  would  sell  in  the  nei^- 
borhood  of  par.  If,  however,  the  same  corporation  should  earn 
twenty  per  cent  instead  of  seven,  the  common  stock  would 
command  a  high  price,  say  400. 

Thus  far  in  our  discussion  of  corporations  we  have  assumed 
that  the  stockholders  alone  furnish  all  the  capital  required. 
In  practice,  however,  corporations,  like  single  enterprisers  and 
partnerships,  usually  find  it  necessary  to  secure  funds  from  out- 
side sources.  The  two  last  named  secure  their  funds  on  prom- 
issory notes ;  the  first,  on  bonds.  These  bonds  are  similar  to 
real  estate  mortgages  in  that  properj^y  in  each  case  is  the  basis 
of  security,  and  like  mortgages  they  are  evidences  of  indebted- 
ness. Bonds  bear  a  definite  rate  of  interest,  and  do  not  entitle 
holders  to  share  in  any  extra  prosperity  the  corporation  might 
enjoy.  Consequently,  fluctuations  in  the  value  of  bonds  are 
much  less  than  they  are  in  the  case  of  stocks.  Of  the  two  forms 
of  investment,  bonds  are  less  speculative,  being  preferred  by 
those  who  place  security  and  a  low  rate  of  income  above  risk 
and  a  higher  rate. 

The  stock  exchange.  —  With  the  beginning  of  the  corporate 
form  of  organization  there  also  began  a  desire  on  the  part  of 
persons  to  buy  and  sell  stocks  and  bonds.  Soon  a  need  was  felt 
for  some  sort  of  central  market  where  buyers  and  sellers,  or 
their  agents,  could  meet  to  bargain.  The  result  was  the  stock 
exchange,  such  as  the  one  in  New  York  City,  where  the  members 
come  together  daily  for  the  purpose  of  buying  and  selling  stocks 
and  bonds,  usually  for  their  customers.  The  development  of 
such  a  central  market  has  affected  favorably  the  growth  and 


94  ELEMENTARY   ECONOMICS 

spread  of  corporations.  Investors  are  easily  persuaded  to  buy 
stocks  and  bonds,  since  they  know  that  they  can  dispose  of  them 
without  difficulty.  In  other  words,  investments  in  stocks  and 
bonds  are  liquid  investments.  Consequently,  billions  of  dollars 
have  been  saved  to  industry,  which  otherwise  would  have  been 
consumed  or  invested  to  less  advantage. 

Corporations  and  funded  incomes.  —  Corporation  develop- 
ment has  made  savings  and  investments  permanent  as  well  as 
easy.  Not  many  years  ago  it  was  a  common  saying  that  in 
America  it  was  but  "  three  generations  from  shirt  sleeves  to 
shirt  sleeves,^'  meaning  thereby  that  one  generation  saved,  the* 
next  squandered,  the  next  saved,  and  so  on  in  an  endless  round. 
Whatever  may  have  been  the  validity  of  this  saying  a  half  cen- 
tury ago,  it  certainly  has  not  been  true  since  corporations  have 
come  to  occupy  such  a  large  place  in  American  industrial  life. 
Now  a  boy  does  not  need  to  be  able  to  succeed  in  business  in 
order  to  keep  his  inheritance  intact.  He  can  invest  it  safely  in 
bonds,  or  even  in  stocks,  enjoying  the  income  while  he  lives, 
passing  the  principal  on  to  the  next  generation.  Such  an 
income  is  known  as  a  funded  income.  The  facility  to  invest 
huge  sums  of  money  with  a  reasonable  degree  of  safety  accounts 
in  large  measure  for  numerous  other  modem  developments. 
Life  insurance  companies,  for  example,  owe  much  of  their 
growth  and  prosperity  to  the  ease  and  slight  expense  with  which 
they  can  invest  their  funds.  Otherwise,  their  chief  source  of 
investment  would  be  real  estate  mortgages,  which,  while  safe, 
are  expensive  to  handle.  Many  colleges  and  universities,  too, 
owe  their  rapid  development  not  more  to  the  generosity  of 
friends  than  to  the  opportunity  they  have  to  invest  their 
endowments.  Numerous  other  institutions,  such  as  libraries, 
hospitals,  learned  societies,  and  settlement  houses,  have  their 
endowments  invested  in  the  same  way. 


ORGANIZATION   OF  INDUSTRY  95 

EXERCISES  AND   PROBLEMS 


1.  What  was  the  essential  difference  between  the  English  Industrial 
Revolution  and  the  American  Industrial  Revolution? 

2.  What  does  an  "industrial  revolution"  mean? 

3.  Is  there  likely  to  be  another  industrial  revolution  ?     Why,  or 
why  not  ? 

4.  Name  three  important  changes  in  agriculture  during  the  past 
half  century. 

5.  How  did  the  tariff  act  of  1816  differ  from  preceding  tariff  acts? 

6.  What  is  meant  by  the  expression  "domestic  manufactures"? 
*  *  factory  system  "  ? 

7.  What  are  the  disadvantages  of  a  partnership? 

8.  Why  did  the  corporative  form  of  business  oi^anization  develop  ? 

9.  What  are  the  chief  merits  of  this  form  ? 

10.  What  is  a  "corporation  charter"? 

11.  Where  and  how  is  it  usually  obtained? 

12.  Distinguish  between  stocks  and  bonds. 

13.  Why  are  most  farms  operated  by  single  enterprisers  ? 

B 

1.  Make  lists  of  single  enterprisers,  partnerships,  and  corporations 
in  your  neighborhood. 

a.  In  which  list  are  found  the  concerns  that  employ  the  largest 

capital  ? 
6.  What  kinds  of  business,  in  general,'  characterize  each  of  these 

lists? 

2.  Get,  if  possible,  a  partnership  agreement  from  some  business  man. 
a.  How  much  money  did  each  partner  invest  ? 
6.  What  specific  duties  are  required  of  each  partner? 
c.   How  may  the  partnership  be  voluntarily  dissolved? 

3.  Write  up  what  you  would  consider  a  good  partnership  agreement 
for  three  men  about  to  engage  in  the  grocery  business. 

4.  Examine  a  stock  certificate,  and  notice  the  following  facts : 

a.  Name  of  owner. 

b.  Number  of  shares. 

c.  Par  value  of  each  share. 

d.  Common  or  preferred. 


i/ 


96  ELEMENTARY   ECONOMICS 

5.   Study  a  stock  report,  to  be  found  in  any  metropolitan  newspaper. 
a.  Notice  the  wide  variation  in  the  prices  of  stocks. 
6.  Why  do  not  bonds  vary  so  widely? 

c.  Compare  price  of  common  stock  and  price  of  preferred  stock 

of  the  same  concern. 

d.  Which  is  subject  to  wider  fluctuations  ?     Why  ? 


1.  Comment  on  the  following  statement:  "The  enactment  of 
corporation  laws  by  the  various  states  is  the  most  important  step  in 
the  development  of  American  manufactures  made  during  the  past 
century." 

2.  "A  corporation  is  nothing  more  than  a  person  without  a  soul." 
a.  Explain  the  general  attitude  of  corporations  toward  society. 
6.  Why  do  many  persons  think  it  permissible  to  cheat  a  cor- 
poration ? 

c.   Can  a  corporation  die  ?     Explain. 

3.  A  corporation  with  a  capital  of  $50,000,  having  outstanding  four 
per  cent  bonds  with  a  par  value  of  $50,000,  earns  $5000  annually. 

a.  How  will  these  earnings  be  divided  ? 
h.  What  will  be  the  dividend  rate  : 
i.  If  all  the  stock  is  common? 
ii.  If  all  the  stock  is  preferred  ? 

iii.  If  one-half  of  the  stock  is  eight  per  cent  preferred? 
c.   What  would  be  a  fair  market  price  of  stocks  under  each 
condition  ? 

4.  Suppose  a  corporation  with  a  capital  of  $100,000,  having  out- 
standing five  per  cent  bonds  with  a  par  value  of  $50,000,  should  fail. 
How  would  settlement  be  made  if  the  total  assets  sold  for  $45,000? 
for  $55,000?  for  $75,000?  for  $100,000?     How,  if  a  partnership  ? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  153-166. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  212-232. 

Fetter,  Economics,  Vol.  II,  pages  408-411. 

Johnson,  Introduction  to  Economics,  pages  125,  126. 

Seager,  Principles  of  Economics,  pages  153-169. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  96-98,  325-327. 

Taussig,  Principles  of  Economics,  2d  ed..  Vol.  I,  pages  86-96. 


CHAPTER  VIII 

DIVISION  OF  LABOR  AND  LARGE-SCALE  PRODUCTION 

22.   The  Factors  of  Production 

Primary  factors  of  production.  —  We  have  come  thus  far  in 
our  study  of  production  without  stopping  to  inquire  about  the 
factors,  or  forces,  that  make  production  possible.  But  there 
is  need  at  this  point  to  classify  these  factors  and  to  examine 
briefly  the  part  each  plays  in  producing  goods. 

The  two  primary  factors  of  production  are  land  and  labor. 
Of  these  two,  the  most  important,  certainly  the  one  that  came 
first  in  point  of  time,  is  land.  The  term  'Mand  "  in  economics 
includes  more  than  farm  lands.  It  embraces  city  lots,  railroad 
rights-of-way,  forests,  mines,  lakes,  rivers,  harbors,  and  oceans. 
Land  furnishes  not  only  our  food  and  clothing,  but  also  our 
homes,  our  automobiles,  and  every  other  commodity  we  may 
possess.  Besides,  it  provides  a  place  on  which  to  live,  to  work, 
to  play,  to  sleep.  Even  before  the  first  man  had  felt  the  need 
to  labor,  land  had  been  producing  for  ages.  Witness  our  vast 
coal  beds.  What  man  or  group  of  men  had  anything  to  do  with 
their  formation?  Yet  we  mine  the  coal  and  carry  it  away 
without  even  a  thought  of  the  force  that  land  has  exerted  to 
produce  it.  We  do,  however,  approach  a  proper  appreciation 
of  the  importance  of  land,  when  it  fails  unexpectedly  to  produce, 
as  is  the  case  when  a  widespread  drought  prevails  in  grain- 
growing  regions,  when  we  feel  a  deprivation  resulting  from  the 
extinction  of  some  fur-bearing  animal,  or  when  we  see  the  havoc 
caused  by  a  mine  subsidence  within  the  limits  of  a  populous 
city. 

97 


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ELEMENTARY   ECONOMICS 


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DIVISION  OF  LABOR,   LARGJJ-SCALE  PRODUCTION    99 

Land  works  blindly,  and  apparently  without  purpose.  The 
same  force  that  stored  the  coal  in  the  earth  raised  useless  moun- 
tain peaks.  This  force  can,  however,  be  directed.  In  fact  it 
is  directed  by  man.  This  direction  we  call  labor.  Historically, 
as  well  as  in  degree  of  importance,  labor  ranks  second  to  land, 
since  without  land  labor  could  not  even  exist,  much  less  produce. 
Whatever  our  own  narrow  experience  may  be,  we  know  that  the 
most  universal,  conscious  activity,  aside  from  consumption,  is 
labor.  On  the  farm,  in  the  shop,  store,  and  office,  about  the 
home,  men  and  women,  and  even  children,  labor  daily  to  produce 
conunodities  for  the  satisfaction  of  human  wants.  Strange  as 
the  statement  may  appear,  labor  in  large  part  is  a  habit,  which 
robs  it  fortunately  of  much  of  its  irkaomeness. 

Secondary  factors  of  production.  —  Obviously,  the  third 
factor  of  production,  capital,  came  after  labor  and  land.  Primi- 
tive man  soon  learned,  in  a  blundering  way  perhaps,  that  he 
could  well  afford  to  spend  labor  on  the  making  of  a  bow  and 
arrow,  or  on  a  stone  ax,  since  by  their  use  he  could  secure  more 
game  or  more  fuel  than  was  possible  working  with  his  hands 
alone.  At  that  moment  capital  came  into  existence.  It  is 
well  to  notice  that  this  first  capital  was  itself  the  product  of  a 
combination  of  land  and  labor,  and  that  all  capital,  rather  in- 
directly to  be  sure,  rests  on  the  same  two  primary  factors  of 
[production.  This  very  fact  is  the  basis  for  the  claim  that  all  the 
^products  of  industry  belong  to  labor.  Turning  again  to  the 
creation  of  the  first  capital,  let  us  formulate  a  definition  of  the 
[term  as  used  in  economics.  Obviously  from  what  has  been 
^said,  it  was  the  product  of  industry,  also  it  was  used  to  further 
production.  Capital,  then,  is  a  product  of  industry  used  for 
further  production. 

On  the  basis  of  this  definition  we  shall  find  it  necessary, 
contrary  to  general  belief,  to  consider  neither  land  nor  con- 
ieumers'  goods  as  capital.     Land,  obviously,  is  not  a  product  of 


100  ELEMENTARY   ECONOMICS 

industry,  though  it  is  used  for  further  production.  Consumers' 
goods,  on  the  other  hand,  are  the  product  of  industry  not  used 
for  further  production.  Whether  or  not  a  good  is  a  producers* 
or  a  consumers'  good  usually  depends  on  the  use  to  which  it  is 
to  be  put  at  the  particular  moment.  Wheat  flour,  for  example, 
in  the  possession  of  a  baker  is  a  producers'  gbod ;  in  the  flour 
bin  at  home  it  is  a  consumers'  good. 

The  fourth  factor  of  production,  we  may  say,  is  the  enter- 
priser, or  business  man.  His  duty  is  to  assemble  the  other 
factors  and  to  direct  their  efforts.  It  is  not,  however,  an  in- 
dispensable one,  for  it  would  be  easy  to  conceive  an  industrial 
society  rather  highly  developed  without  men  exercising  the 
distinctive  duties  of  an  enterpriser.  Yet  we  must  not  forget 
that  society  as  it  is  now  organized  utilizes  the  services  of  such 
men ;  also  that  if  each  man  worked  for  himself  and  confined  his 
own  consumption  exclusively  to  his  own  products,  the  efficiency 
of  his  production,  would  depend  in  some  measure  on  his  ability 
to  organize  his  own  labor,  his  own  land,  and  his  own  capital. 
For  that  reason  we  are  justified  in  calling  the  skill  of  enterprisers 
a  factor  of  production. 

23.  Division  of  Labor 

Varieties  of  division  of  labor.  —  In  the  early  Hfe  of  a  people 
and  on  the  frontiers  of  older  nations,  every  man  must  necessa- 
rily be  a  jack-of-all-trades.  He  must  clear  his  land,  build  his 
fences,  construct  his  cabin  and  sheds,  make  his  own  furniture, 
tan  the  leather  for  his  shoes,  and  perform  many  other  similar 
tasks,  all  of  which  are  necessary  to  his  very  existence.  As 
population  increases,  each  one  gives  more  and  more  attention 
to  the  trade  or  profession  he  is  best  prepared  to  follow.  Some 
become  carpenters;  some,  farmers;  some,  blacksmiths;  and 
some,  tanners.  The  carpenter,  for  example,  spends  his  whole 
time  engaged  in  his  trade,  and  he  is  able  to  perform  all  the  opera- 


DIVISION  OF  LABOR,  LARGE-SOAliS  I^RODUCTION     101 


tions  which  are  necessary  in  erecting  a  building.  He  does  the 
finishing  work  as  well  as  erect  the  frame.  Moreover,  he  makes 
doors,  glazes  windows,  and  builds  furniture.  Likewise  the 
farmer,  the  blacksmith,  and  the  tanner,  each  performs  all  the 

Population  of  the  United  States  in  Municipalities  having  over 
30,000  Inhabitants,  in  those  having  from  8,000  to  30,000,  and 
OUTSIDE  such  Municipalities  :  1790-1912. 


MILLIONS 


10 


30 


70 


100 


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gmi  CITIES  WITH  30.000  OR  MORE  POPULATION 
V^^A  CITIES  WITH  8.000  TO  30.000  POPULATION 
Y/////X  POPULATION  OUTSIDE  SUCH  CITIES 

operations  necessary  to  carry  his  product  from  the  raw  material 
to  the  finished  state.  This  stage  of  industrial  development 
characterized  American  life  and  industry  for  two  centuries; 
and  we  may  call  it  simple  division  of  labor. 

The  next  step  in  the  development  of  division  of  labor  con- 
sisted in  dividing  the  operations  of  a  single  trade  among  in- 


102    '  ^^  '''  «  ''''  'SL^lvfli^YARY   ECONOMICS 

dividuals  or  groups.  Instead  of  the  carpenter,  we  have  work- 
men for  the  rougher  work,  others  for  finishing,  others  for  door 
and  cabinet  work,  and  still  others  who  specialize  in  glazing. 
This  stage  we  call  the  complex  division  of  labor,  and  we  may- 
observe  its  operation  all  about  us  in  every  craft  and  profession. 
Carpenters  alone  no  longer  build  our  'houses.  To  assist  them 
we  employ  masons,  plasterers,  plumbers,  and  electricians.  Pro- 
fessional people  likewise  specialize  in  narrow  fields.  Some 
physicians  give  their  whole  time  to  particular  ailments ;  lawyers 
become  highly  trained  in  particular  kinds  of  work;  while 
teachers  confine  their  attention  to  as  few  subjects  as  possible. 

Perhaps  the  best  example  in  the  development  of  the  division 
of  labor  is  found  in  the  manufacture  of  shoes.  Under  pioneer 
conditions  a  workman  tanned  the  leather  and  from  it  made 
shoes  for  himself  and  family.  Later  he  gave  his  whole  time  to 
making  shoes,  disposing  of  the  surplus  to  his  neighbors.  At  the 
present  time  the  making  of  shoes  is  confined  almost  entirely  to 
factories,  where  scores  of  men  perform  as  many  different  opera- 
tions in  making  a  single  shoe. 

The  encroachment  of  the  complex  division  of  labor  on 
crafts  and  trades  has  had  a  curious  effect.  It  has,  as  it  were, 
robbed  the  craftsman  of  his  skill.  Shoemakers  no  longer  make 
shoes,  neither  do  watchmakers  make  watches,  while  a  tailor 
shop  is  often  nothing  more  than  a  place  for  repairing,  cleaning, 
and  pressing  clothing. 

Human  qualities  necessary  for  effective  division  of  labor.  — 
The  more  complex  forms  of  division  of  labor  have  developed 
with,  and  depended  on,  a  corresponding  development  of  the 
spirit  of  cooperation  and  mutual  helpfulness  among  individuals. 
In  any  highly  developed  industry,  the  making  of  shoes,  for 
example,  the  efficiency  and  progress  of  one  worker  depend  on 
every  other  worker  being  in  his  place  at  the  proper  time  and 
performing  exactly  the  operation  which  he  is  expected  to  per- 


DIVISION  OF  LABOR,  LARGE-SCALE  PRODUCTION     103 

form.  The  failure  of  one  workman  properly  to  cooperate  dis- 
organizes the  whole  series  of  operations  and  lessens  the  total 
output ;  and  such  failure  on  the  part  of  an  individual  or  of  in- 
dividuals leads  not  toward  a  higher  stage  of  division  of  labor, 
but  rather  in  the  opposite  direction. 

We  may  properly  inquire,  then,  what  are  the  chief  character- 
istics which  individuals  ought  to  possess  in  order  to  bring  division 
of  labor  to  its  highest  point  of  development.  They  are  four 
in  number:  (1)  honesty,  (2)  obedience,  (3)  steadiness,  (4) 
fairness. 

Honesty  is  the  very  heart  of  successful  division  of  labor. 
Workers,  in  order  to  be  highly  efficient,  must  beUeve  in  their 
associates  as  well  as  in  themselves.  Each  one  must  have  the 
assurance  that  his  fellow  workers  are  performing  their  appointed 
tasks  honestly  and  with  a  conmion  purpose.  Among  dishonest 
men  such  an  assurance  would  be  impossible.  Workers  must 
also  be  obedient  in  following  plans  of  operation;  for  complex 
division  of  labor,  and  even  the  simpler  kinds,  provide  for  those 
who  plan  as  well  as  for  those  who  execute.  Workers  engaged  in 
specialized  tasks  must  be  steady  as  well  as  honest  and  obedient. 
Nothing  disturbs  industry  more  than  the  failure  of  workers  to  be 
on  hand  at  the  appointed  time,  or,  if  on  hand,  to  be  incapacitated 
by  vicious  habits.  To  take  an  extreme  example,  suppose  the 
engineer  of  a  shoe  factory  should  fail  to  be  in  his  accustomed 
place  when  the  moment  arrived  for  starting  the  machinery. 
'  Obviously,  little  or  no  work  could  be  done  until  he  was  found  or 
his  place  was  filled.  There  are  men  who  possess  all  these  qual- 
ities in  some  degree,  but  who,  nevertheless,  retard  the  develop- 
ment of  division  of  labor  simply  because  they  are  so  filled  with 
prejudice,  and  so  set  in  their  ways,  as  to  make  them  domineering, 
and  hence  unpopular  among  their  associates.  In  other  words, 
they  are  mentally  unfair.  Thus,  workers  in  any  line  where 
division  of  labor  is  developed  must  cooperate  not  only  indus- 


104 


ELEMENTARY   ECONOMICS 


Per  Cent  of  Total  Population  of  the  United  States  in  Munici- 
palities HAVING  over  30,000  Inhabitants,  in  those  having 
FROM  8,000  to  30,000  Inhabitants,  and  outside  such  Munici- 
palities :  1790-1912. 

PER  CENT 

30 40     50     60     70     80     90     100 


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HHJPER  CENT  IN  CITIES  WITH  30,000  OR  MORE  POPULATION 
^^^jPER  CENT  IN  CITIES  WITH  8.000X0  30,000  POPULATION 
\/////A^^^  CENT  OUTSIDE  SUCH  CITIES 

trially,  but  also  socially;  each  giving  and  taking  in  a  spirit  of 
conciliation  and  compromise. 

Economic  and  social  advantages  of  division  of  labor.  — 
Obviously,  the  first  economic  advantage  of  division  of  labor  is 
an  increased  production.  The  early  shoemaker,  by  confining 
his  attention  to  the  making  of  shoes,  increased  his  skill,  with  the 
result  that  his  product  was  greater  than  it  had  formerly  been 
when  he  was  compelled  to  tan  his  own  leather.  Likewise,  the 
workers  in  a  shoe  factory  become  highly  proficient  in  the  few 
simple  operations  which  they  perform,  and  though  their  in- 


DIVISION  OF  LABOR,   LARGE-SCALE  PRODUCTION      105 

creased  output  may  not  be  so  evident  as  it  was  in  the  former 
case,  it  exists  nevertheless.  Division  of  labor  has  still  another 
economic  advantage.  The  few  simple  operations  that  char- 
acterize complex  division  of  labor  are  easily  learned,  and  for  that 
reason  no  long  period  of  training  or  apprenticeship  is  necessary, 
as  was  formerly  the  case .  Consequently  there  is  a  saving  of  time 
both  by  the  employee,  who  quickly  becomes  a  skilled  operative, 
and  by  the  employer,  who  finds  it  unnecessary  to  spend  any  great 
amount  of  time  in  training  his  workmen.  The  chief  economic 
advantage  of  division  of  labor,  to  repeat,  is  increased  output, 
which  is  accomplished  to  a  great  extent  through  specialization, 
and  through  a  saving  of  time  formerly  necessary  to  acquire  skill. 

Socially,  there  are  advantages  to  be  derived  from  complex 
division  of  labor.  The  same  qualities  that  make  workers  indus- 
trially efficient  and  teach  them  to  cooperate  also  develop  the 
spirit  of  social  service,  and  do  much  to  rob  the  individual  of  his 
selfishness.  Men  who  work  together  all  day  are  easily  organized 
into  unions  and  social  clubs.  Their  close  contact  in  industry  gives 
them  a  common  interest  and  assists  in  creating  a  social  solidarity. 

Division  of  labor  produces  yet  another  social  advantage. 
With  increased  production  it  is  no  longer  necessary  for  workers 
to  labor  twelve  or  fourteen  hours  a  day.  Moreover,  the  workers 
themselves  through  organization  have  become  stronger,  and 
better  able  to  secure  their  demands.  These  two  forces  have 
combined  to  shorten  the  labor  day,  and  correspondingly  to 
increase  the  daily  periods  of  leisure.  The  result  is  that  workers 
in  specialized  lines  have  more  time  for  recreation,  for  social 
intercourse,  and  for  self-education. 

Disadvantages  of  complex  division  of  labor.  —  Not  all  of 
the  results  that  arise  from  highly  developed  division*  of  labor 
are  advantageous,  either  to  the  individual  or  to  society.  The. 
monotonous  repetition  of  simple  operations  tends  to  stunt  the 
intellect,  and  to  destroy  the  power  of  initiative.     Moreover, 


106  ELEMENTARY   ECONOMICS 

it  discourages  ambition,  since  it  narrows  the  horizon  of  the 
worker  and  appears  to  offer  him  Uttle  or  no  opportunity  to 
improve  his  industrial  position.  In  short,  complex  division  of 
labor  tends  to  rob  the  individual  of  intellect,  initiative,  and 
ambition,  all  of  which  are  essential  to  the  best  interests  of 
society.  In  the  professions,  however,  similar  specialization 
appears  to  be  less  deadening,  if  it  is  deadening  at  all. 

24.   Territorial  Division  of  Labor 

Principle  of  the  territorial  division  of  labor.  —  Quite  as  im- 
portant as  the  division  of  labor  among  individuals  and  among 
groups  where  each  performs  a  highly  specialized  piece  of  work, 
is  the  division  of  labor  among  localities  and  regions.  This  we 
may  call  territorial  division  of  labor;  and  its  development  has 
depended  in  large  measure  on  improvements  in  transportation, 
particularly  railway  transportation,  and  on  the  use  of  money  as 
a  medium  of  exchange.  In  medieval  England  and  during  our 
own  colonial  period  each  section  or  region  was  well-nigh  self- 
sufficing  ;  that  is,  it  produced  practically  all  the  goods  consumed 
by  its  inhabitants.  Similar  conditions  existed  on  the  western 
frontier  during  the  greater  part  of  the  nineteenth  century. 

Territorial  division  of  labor,  as  has  been  noted,  waited  for 
its  development  on  improved  methods  of  transportation  and  on 
a  money  economy ;  yet  the  underlying  causes  for  its  existence 
are  as  old  as  time  itself.  Soil,  climate,  water  power,  mineral 
deposits,  and  a  variety  of  other  natural  resources  create  differ- 
ences among  the  various  sections  of  a  large  country  hke  the 
United  States  aiid  among  the-  smaller  countries  of  Western 
Europe.  As  a  result,  the  people  of  one  section  can  best  afford 
to  spend  their  energies  in  raising  wheat,  of  another  in  growing 
grapes,  of  another  in  herding  sheep,  of  another  in  building  ships, 
and  of  another  in  manufacturing  iron  or  cloth.  Each  section, 
assisted  by  nature  and  by  an  increased  skill  and  knowledge  due 


DIVISION  OF  LABOR,   LARGE-SCALE  PRODUCTION      107 

Proportion  of  Population  10  Years  of  Age  and  over,  in  Each 
State,  Engaged  in  Each  General  Division  of  Occupation  :  1910. 


MONTANA 

MICHIGAN 

OREGON   . 

UTAH 

DELAWARB 

MAINE 

ARIZONA 

COLORADO 

WASHINGTON 

OHIO 

MARYLAND 

CALIFORNIA 

ILLINOIS 

NEVADA 

NEW  HAMPSHIRE 

PENNSYLVANIA 

CONNECTICUT 

NEW  YORK 

NEW  JERSEY 

RHODE  ISLAND 

MASSACHUSETTS 

OIST   OF  COLUMBIA 


*  !«:>i«r-X!»r««5:.K*;»:^^^^^^  1 1 1 1 1  scss^v-  isk  •■xxx.ii 


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<^^^^^^^^^J(^A 


V77X  AGRICULTURE.  FORESTRY,  AND  ANIMAL  HUSBANDRV  |B|  EXTRACTION  OF  MINERAL 

ESSS3 MANUFACTURING  AND  MECHANICAL  INDUSTRIES  flTl  TRANSPORTATION 

HSBTRADl  I  I  PUBLIC  SERVICE  (NOT  ELSEWHERE  CLASSIFIED) 

E3  PROFESSIONAL  SERVICE  ^^  CLERICAL  OCCUPATIONS 

2Q  DOMESTIC  AND  PERSONAL  SERVICE 


108  ELEMENTARY    ECONOMICS 

to  specialization,  produces  commodities  of  a  greater  value  than 
it  could  produce  were  it  compelled  to  engage  in  other  and  less 
productive  industries.  Hence,  it  produces  a  surplus,  which  it 
exchanges  for  the  surpluses  of  other  sections. 

Territorial  division  of  labor  in  the  United  States.  —  In  no 
other  country  has  territorial  division  of  labor  developed  more 
rapidly  and  to  a  greater  extent  than  m  the  United  States.  Here 
we  have  a  diversity  of  natural  resources,  which  are  utilized  to 
advantage  by  a  people  naturally  apt  and  trained  above  the 
average,  f^owhere  else  are  there,  on  such  a  large  scale,  more 
fertile  farm  lands,  more  productive  mines,  and  more  accessible 
water  power.  For  that  reason  the  United  States  has  become  a 
great  manufacturing  nation,  without  losing  its  position  as  the 
leader  in  agricultural  production. 

The  particular  reasons  for  the  superiority  of  one  section 
over  another  in  any  line  of  industry  are  fairly  easy  to  under- 
stand. In  New  England,  fertile  land  is  scarce,  an  adequate 
fuel  supply  is  relatively  close  at  hand,  and  the  population  is 
dense.  There  we  find  manufactures.  A  similar  condition 
exists  in  New  York,  Pennsylvania,  and  New  Jersey.  The  great 
Mississippi  Valley,  which  is  the  largest  area  of  fertile  land  in 
the  world,  furnishes  foodstuffs  in  the  form  of  com,  wheat,  cattle, 
and  swine.  Here  also  are  to  be  found  many  manufacturing 
establishments,  for  the  city  population  is  large  and  the 
mineral  supply  is  available  and  plentiful.  The  southern  and 
southwestern  sections  produce  cotton;  the  Pacific  Coast, 
fruit,  lumber,  and  grain;  the  Rocky  Mountain  regions, 
minerals  and  lumber. 

25.   Large-scale  Production 
Advantages   of  large-scale  production.  —  One  of  the  most 
common  phenomena  to  be  observed  in  business  at  the  present 
time  is  large-scale  production.     Almost  every  line  of  industry 


DIVISION  OF  LABOR,  LARGE-SCALE  PRODUCTION    109 

has  felt  its  influence.  Rapidly  our  factories  have  been  en- 
larged; and  our  railway  lines  lengthened  and  consolidated 
into  great  systems.  Even  in  retailing,  the  advantages  of  large 
scale  production  have  been  demonstrated.  Agriculture  alone 
seems  to  stand  unaffected,  with  the  result  that  the  average  size 
of  farms  in  the  United  States  is  less  than  it  was  a  half  century 
ago. 

The  adaptation  of  the  principle  of  large-scale  production 
to  American  industry  has  created  several  distinct  and  highly 
important  problems.  Obviously,  the  first  result  is  an  increased 
output,  and  the  distribution  of  this  increase  among  the  various 
factors  of  production  (labor,  including  the  enterpriser,  land, 
and  capital)  creates  problems  both  social  and  economic. 
Large-scale  production  causes  the  concentration  of  workers,  and 
this  concentration  raises  problems  of  housing,  of  government, 
and  of  social  development.  Furthermore,  large-scale  production 
permits  of  a  decreased  unit-cost  production,  with  the  result 
that  small  industries  are  driven  out  of  business,  while  the  large 
ones  tend  to  become  monopolies.  Such  a  development  has 
actually  taken  place  in  the  United  States,  where  many  hues  of 
production  have  fallen  into  the  hands  of  the  so-called  trusts. 

We  have  seen  how  large-scale  production  increases  the  output 
at  a  decreased  cost,  and  we  may  now  properly  inquire  why  such 
is  the  case. 

The  factors  that  contribute  to  the  efficiency  of  large-scale 
production  are  five  in  number.  (1)  Division  of  labor,  which 
always  accompanies  large-scale  production,  permits  the  use 
of  varied  talents  and  aptitudes,  whereby  each  worker  can  con- 
fine his  attention  and  efforts  to  the  particular  operation  in  which 
he  is  the  most  proficient.  (2)  The  latest  and  most  improved 
machinery  can  be  utilized,  something  which  is  usually  impossible 
in  small-scale  production.  In  the  Chicago  plant  of  the  Inter- 
national Harvester   Company  is  a   machine   costing  several 


110  ELEMENTARY   ECONOMICS 

thousand  dollars  which  performs  a  simple  operation  on  wagon 
and  other  tongues  at  a  saving  over  old  methods  of  a  few  cents 
each.  Obviously,  such  a  saving,  which  mounts  high  in  the 
aggregate,  is  possible  only  when  the  volume  of  output  is  enor- 
mous. (3)  Large-scale  production  also  permits  of  economies 
in  buying  raw  materials  and  in  selling  finished  products.  It  is 
a  well-known  fact  that  large  purchasers  can  buy  at  a  cheaper 
price  than  small  ones;  and  equally  as  well  known  that  large 
producers  are  able  to  economize  in  the  matter  of  advertising, 
and  of  getting  their  products  in  the  hands  of  retailers  through 
traveling  salesmen.  (4)  Large-scale  industries  are  better  able 
to  utilize  their  by-products.  In  the  slaughtering  industry,  for 
example,  a  large  plant  can  make  use  of  hair,  blood,  and  other 
by-products  which  the  local  butcher  allows  to  go  to  waste.  (5) 
The  large-scale  producer  can  better  afford  to  carry  on  expensive 
experiments  with  the  idea  of  improving  his  product  and  of 
lessening  unit  cost.  So  well  recognized  is  this  advantage  that 
such  large  concerns  as  the  United  States  Steel  Corporation 
maintain  extensive  laboratories  and  employ  a  great  many 
trained  experimenters. 

Restrictions  on  large-scale  production.  —  There  are  several 
restrictions  on  large-scale  production,  one  or  two  of  which  we 
may  profitably  examine  at  this  point.  First  of  all,  any  indus- 
try is  likely  to  grow  so  large  as  to  become  unwieldy.  Such  an 
industry  is  no  longer  the  ''  child  "  of  the  one  who  developed  it. 
It  is  now  impersonal.  Consequently,  its  administration  and 
management  is  divided  among  hired  superintendents:  each 
ambitious  to  develop  his  own  department;  each  more  or  less 
selfish  in  his  attitude  toward  the  whole  industry ;  and  none  with 
the  keen  interest  of  the  owners  of  smaller  plants.  When  a  unit 
of  industry  reaches  this  stage  in  the  development  of  large-scale 
production,  it  is  likely  to  be  less  efficient  than  smaller  ones  in 
the  same  line  of  business.    Such  industries  resemble  in  many 


DIVISION  OF  LABOR,  LARGE-SCALE  PRODUCTION     HI 

respects  the  overgrown  trees  of  the  forest,  towering  above  the.r 
fellows  in  height,  but  rotten  at  the  heart  and  exposed  to  every 
Lssing  storm. 

EXERCISES   AND   PROBLEMS 


1.  Why  is  land  the  most  fundamental  factor  of  production  ? 

2.  Why  is  capital  less  fundamental  than  either  land  or  labor  ? 

3.  Distinguish  between  capital  and  land ;   capital  and  consumers* 
goods. 

4.  Does  capital  yield  a  product  apart  from  the  employment  of 
labor  ?     Explain. 

5.  What  are  the  advantages  of  division  of  labor? 

6.  Suggest  ways  of  lessening  the  disadvantages  arising  from  the 
division  of  labor. 

7.  What  factors  may  limit  the  division  of  labor  in  any  industry? 

8.  What  is  the  relation  between  the  corporative  form  of  organi- 
zation and  division  of  labor  ? 

9.  Why  is  division  of  labor  in  agriculture  not  practiced  to  any  great 
extent  ? 

10.  How  does  territorial  division  of  labor  increase  the  efficiency  of 
production  ? 

11.  What  is  the  present  tendency  in  the  United  States  as  to  terri- 
torial division  of  labor  ? 

12.  Point  out  the  relation  between  division  of  labor  and  large-scale 
production ;  between  the  corporative  form  of  organization  and  large- 
scale  production. 

13.  Are  there  any  advantages  in  large-scale  production  in  agri- 
culture?    Explain. 

14.  What  are  the  Umits  to  large-scale  production? 

15.  What  are  the  present  tendencies  as  to  large-scale  production  in 
manufactures? 

B 

1.   Make  a  list  of  consumers'  goods. 

a.  Explain  why  each  is  a  consumers'  good. 
h.  Can  any  of  them  be  producers'  goods  ? 

c.  What  is  the  essential  difference  between  consumers'  goods  and 
producers'  goods? 


112  ELEMENTARY    ECONOMICS 

2.  From  your  own  experience  or  observation  describe  the  division 
of  labor  carried  on  in  some  shop  or  factory. 

3.  Call  to  mind  persons  who  produce  all  the  goods  they  consume; 
who  produce  a  portion  of  the  goods  they  consume  ;  who  produce  none  of 
the  goods  they  consume.     Which  is  the  largest  group  ?     Why  ? 

4.  Make  a  list  of  common  schoolroom  objects,  such  as  desk,  black- 
board, book,  crayon,  ink,  eraser,  and  note  the  importance  of  territorial 
division  of  labor. 

5.  Mention  several  industries  in  the  same  line. 

a.  In  which  is  division  of  labor  best  developed  ? 

h.  Show  how  there  is  room  for  greater  development. 

c.  In  which  is  division  of  labor  least  developed  ? 

d.  Account  for  this  lack  of  development. 

e.  Which  of  the  two  has  the  greater  capital  ? 
/.   Which  is  the  more  enterprising  ? 

g.  Suggest  methods  of  improvement. 


1.  A  well-known  retail  merchant  once  said  that  the  cornerstone  of 
any  business  success  is  honesty. 

a.  What  did  he  mean  by  the  expression  "honesty"? 
6.  Is  an  employee  thoroughly  honest  who : 
i.  Shirks  his  duties? 
ii.  Keeps  one  eye  on  the  clock? 

iii.  Places  his  employer's  interests  second  to  his  own? 
c.   What  is   your  opinion  of  the  axiom,  "Honesty  is  the  best 
policy"? 

2.  It  is  believed  by  many  people  that  each  section  of  the  country 
would  be  greatly  benefited  by  becoming  self-sufficing. 

a.  If  such  were  the  case,  would  there  be  more  or  less    goods 

produced  ? 
h.  How  would  such  a  condition  affect  wealth  ?  welfare  ? 
c.   How  do  the  railroads  regard  self-sufficiency? 

3.  Comment  on  the  following  statements  : 

a.  "Division  of  labor  is   the  unconscious  cooperation   of   the 

members  of  society." 
h.  "Producers'  goods  ripen  into  consumers'  goods." 
c.   "Large-scale  production  in  any  industry  is  limited  only  by 

the  amount  of  capital  which  that  industry  can  control." 


DIVISION  OF  LABOR,  LARGE-SCALE  PRODUCTION      113 


SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  149- 

156,  176-184. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  19-21,  124-129. 
Fisher,  Elementary  Principles  of  Economics,  pages  193,  450,  451. 
Johnson,  Introduction  to  Economics,  pages  110-120. 
Seager,  Principles  of  Economics,  pages  153-160. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  290-296. 
Taussig,  Principles  of  Economics,  2d  ed.,  VoL  I,  pages  30-66. 


CHAPTER  IX 
LAND    (NATURAL   RESOURCES) 

26.   Land  as  a  Productive  Factor 

Nature  and  definition  of  land.  —  We  have  noticed  already 
that  land,  which  is  a  short  and  expressive  term  for  natural 
resources,  is  one  of  the  factors  of  production;  and  that  the 
other  two  chief  factors,  labor  and  capital,  are  useless  without  its 
cooperation.  Now  we  may  properly  turn  our  attention  to  a 
more  detailed  examination  of  the  part  which  land  plays  in  the 
production  of  economic  goods. 

Land  is  the  basis  of  all  production,  the  source  of  all  economic 
wealth.  From  it,  directly  or  indirectly,  come  all  of  the  raw 
materials  on  which  the  whole  process  of  production  rests. 
Labor  and  capital  take  the  raw  materials  of  nature,  and  then 
create,  as  we  have  seen,  utilities  of  form,  place,  time,  or  posses- 
sion, but  farther  than  that  they  cannot  go.  Land  as  such 
labors  without  reward,  and  its  products  are  free  to  him  who  will 
come  and  take  them ;  who  under  conditions  of  modem  society  is 
the  landowner.  Of  the  three  chief  factors  in  production,  land 
alone  is  incapable  of  being  appreciably  increased  in  amount :  for 
all-practical  purposes  the  surface  of  the  earth  is  fixed  in  area,  and 
its  productive  qualities  are  fairly  well  known.  At  least  they  are 
predetermined,  and  merely  wait  to  be  utilized  by  labor  and  capital. 

To  get  a  clearer  understanding  of  the  term  ''land,"  let  us  di- 
vide it  into  its  numerous  subdivisions.  There  is  the  large  area  of 
farm  land  from  which  the  world  gets  its  food  supply  and  a  great 
deal  of  its  material  for  clothing ;  the  forests  provide  lumber  and 

114 


LAND  (NATURAL  RESOURCES) 


115 


fuel ;  city  lots  furnish  sites  for  dwellings,  stores,  warehouses,  and 
factories ;  from  the  mines  come  fuel,  iron,  and  precious  metals, 
and  from  the  quarries,  stone  for  building  and  other  purposes ; 

Relative  Proportion  of  Improved  and  Unimproved  Land  Area  in 
Farms  to  the  Total  Land  Area  of  the  United  States  :  1860, 
1890,  1910. 


waterfalls  generate  power ;  while  waterways,  harbors,  and  rail- 
road lands  facilitate  the  transfer  of  goods  from  the  producer  to 
the  consumer.  All  these  are  but  different  phases  of  the  same 
factor  —  namely,  land,  or  natural  resources. 

Varying  costs  in  production.  —  From  what  has  been  said 
it  will  readily  be  understood  that,  inasmuch  as  nature  is  stingy 
and  has  seen  fit  not  to  distribute  her  bounties  everywhere  aUke, 
the  productivity  of  land  varies  from  one  piece  to  another.  That 
this  statement  is  true,  can  be  verified  on  every  hand.  One  plot 
of  ground  produces  more  wheat  than  another  of  the  same  size  on 
which  an  equal  amount  of  labor  and  capital  has  been  expended. 
Similarly,  one  building  lot  yields  more  utilities  than  another; 
and  one  mine  is  more  cheaply  worked  than  another.  In  the  first 
case,  the  most  important  factor,  though  by  no  means  the  only 
one,  is  fertility ;  in  the  second  it  is  location  ;  and  in  the  third  it 
is  depth  of  shaft  and  thickness  of  vein.  But  in  any  of  the  three 
cases  nature  has  contributed  in  varying  degrees  of  effectiveness, 
thereby  causing  differences  in  the  costs  of  production. 


IIG 


ELEMENTARY   ECONOMICS 


Our  more  general  experiences  in  varying  costs  of  production 
are  with  agriculture.  One  farmer  cultivates  soil  especially 
adapted  to  corn-growing.  Another  farmer,  on  land  less  fertile, 
labors  just  as  hard  and  employs  an  equal  amount  of  capital. 
Yet  he  gets  smaller  returns.  Still  another  farmer,  on  the 
poorest  land,  which  we  shall,  in  anticipation,  call  no-rent  land, 
grows  exactly  enough  corn  to  repay  him  for  his  employment  of 


Copyright  Underwood  &  Underwood,  N.  Y. 


.u 


DERN  Method  of  Harvesting  Corn. 


labor  and  capital.  Obviously,  the  first  farmer  enjoys  a  relatively 
large  return  over  and  above  his  costs  of  production ;  the  second 
one,  a  fair  return ;  while  the  farmer  on  the  no-rent  land  gets  no 
such  return.  Thus,  other  factors  in  fixing  the  costs  of  growing 
com,  such  as  location,  skill  in  farming,  improvement  in  the  arts, 
remaining  the  same,  the  unequal  contribution  of  natural  re- 
sources in  the  form  of  fertility,  climate,  and  rainfall  causes  a 
corresponding  difference  in  costs  of  production  to  corn-growers. 


LAND    (NATURAL   RESOURCES)  117 

Scarcely  less  important  in  causing  varying  costs  of  pro- 
duction in  growing  com,  or  any  other  agricultural  crop,  is 
location.  Our  farmer  who  cultivates  the  best  land  might  lose 
the  advantage  coming  to  him  from  the  use  of  the  most  fertile 
soil,  if  his  farm  were  located  in  some  region  remote  from  trans- 
portation facilities;  that  is,  his  gain  from  fertile  soil  might 
be  offset  by  his  loss  through  costly  transportation.  For  that 
very  reason  farm  lands  situated  near  markets  or  at  least  near 
good  transportation  lines,  rail  or  water,  ordinarily  command 
higher  prices  and  higher  rents  than  would  be  the  case  if  less 
advantageously  located. 

Concrete  examples  of  varying  costs  of  production  in  agri- 
culture due  to  the  unequal  distribution  of  the  gifts  of  nature 
or  to  differences  in  costs  of  transportation  are  easily  found 
in  the  United  States.  New  England  farmers,  as  a  class,  have 
less  fertile  soil  than  Iowa  farmers.  Hence,  their  cost  of  pro- 
ducing a  bushel  of  com  is  higher  than  it  is  in  Iowa.  Also  in 
Iowa  two  pieces  of  land  of  the  same  fertility  may  show  differ- 
ences in  unit-cost  of  production  owing  to  the  superior  location 
of  one  or  the  other  in  respect  to  transportation. 

In  the  use  of  any  other  form  of  land  —  city  lots,  mines, 
waterfalls  —  similar  differences  arise.  Two  merchants  of 
equal  ability,  with  stocks  of  goods  exactly  alike,  will  carry  on 
their  respective  businesses  at  different  costs  of  production  if 
the  two  pieces  of  land  which  they  utiUze  are  not  similarly 
situated  as  to  the  passing  crowds.  Likewise,  the  owners  of 
mines  find  differences  in  costs  of  production  owing  to  the  depth 
of  the  ores,  and  the  location  of  the  mines.  Everywhere  in  the 
use  of  land  these  differences  appear,  causing  differences  in  costs 
of  production. 

Because  of  the  important  place  which  land  holds  in  production 
we  can  well  afford  to  spend  the  time  necessary  to  make  a  hurried 
survey  of  the  natural  resources  of  our  own  country. 


118  ELEMENTARY   ECONOMICS 

27.   Natural  Resources  of  the  United  States 

Agricultural  lands.  —  The  most  outstanding  feature  of 
American  industry  is  the  abundance  of  fertile  farm  lands.  Upon 
no  other  country  has  nature  lavished  this  gift  so  freely,  and  no 
other  people  have  appropriated  this  gift  to  better  advantage. 
Here  we  have  a  partial  explanation  of  the  prosperity  of  our 
people  and  a  partial  cause  of  our  disregard  for  thrift.. 
Continental  United  States  embraces  an  area  of  approximately 
three  million  square  miles,  or  two  bilUon  acres.  Of  this  great 
area  practically  one-half  is  under  cultivation.  The  rest  is 
utilized  for  other  industrial  purposes,  such  as  in  city  sites,  in 
forests,  and  in  reservations,  or  is  allowed  to  remain  unappro- 
priated as  are  the  desert  lands  in  the  Southwest.  The  wide 
expanse  of  the  country  north  and  south  accounts  in  large  part 
for  the  diversity  of  crops  which  we  are  able  to  produce.  From 
the  North  and  Northwest  comes  wheat;  from  the  central 
Mississippi  Valley,  corn  and  oats ;  from  the  upper  South,  to- 
bacco; from  the  Gulf  regions,  cotton,  rice,  and  sugar;  from 
California  and  Florida,  subtropical  fruits ;  while  the  production 
of  hay,  vegetables,  small  fruits,  live  stock,  poultry,  milk,  and 
cheese  is  carried  On  in  all  sections  of  the  country.  Thus,  the 
variety  of  the  agricultural  products  of  our  country  is  as  great 
as  that  of  all  Western  Europe  with  its  numerous  political  units 
and  its  relatively  large  population.  In  other  words,  the  United 
States  as  a  single  nation  possesses  agricultural  possibilities 
possessed  by  no  European  country. 

Forests  and  mines.  —  The  United  States  is  rich  also  in  forests, 
despite  the  prodigal  waste  of  timber  that  has  gone  on  for  more 
than  a  century.  Oak,  pine,  cypress,  and  other  kinds  of  trees 
are  found  in  abundance,  which  accounts  for  the  common  saying 
that  **  America  is  a  land  of  wooden  houses."  Every  year  the 
forests  of  the  country  yield  billions  of  feet  of  lumber,  and 


LAND    (NATURAL   RESOURCES) 


119 


^^^K    :^ 

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A  ^\*^  li^^ 

^   /-V"^lJ^^m7\»           .^^^^^Km    ^ 

yi^^m 

1^^ 

w^ 

^^a 

Si 

Myfj^J4.____ 

ffpp 

^ 

J^SsV^ 

/       r  yfflfcj?        L_L~I 

^^       '  oiiiiii 

120  ELEMENTARY   ECONOMICS 

enormous  quantities  of  wood  pulp,  fuel,  mine  props,  and 
numerous  other  products  of  commerce.  As  might  be  supposed, 
our  forests  are  in  danger  of  depletion.  The  national  govern- 
ment, however,  as  well  as  a  number  of  the  states,  have  under- 
taken seriously  within  the  past  few  years  to  prevent  forest  waste 
and  to  see  that  planting  of  forest  trees  is  not  neglected. 

Our  mines  are  also  rich,  numerous,  and  widely  distributed. 
The  California  gold  fields  were  for  many  years  after  1848  the  El 
Dorado  of  the  whole  world.  This  industry  is  still  important, 
though  it  has  been  robbed  of  much  of  its  romance  and  glamour 
by  the  more  prosy  methods  of  capitalistic  production.  Soft 
coal  is  found  in  abundance  in  many  widely  separated  regions, 
while  hard-coal  mining  is  confined  to  eastern  Pennsylvania. 
Our  deposits  of  iron  ore,  which  seem  to  be  almost  inexhaustible, 
are  also  found  in  many  localities.  Silver,  copper,  zinc,  and  lead 
add  materially  to  our  mineral  resources,  while  petroleum,  from 
which  gasoline,  oils,  and  other  products  of  commerce  are  made, 
mounts  annually  in  value  to  hundreds  of  millions  of  dollars. 

Water  power  and  the  fisheries.  —  The  third  group  of  natural 
resources  which  we  will  notice  in  this  connection  comprises 
water  power  and  the  fisheries.  For  many  years  after  steam 
began  to  be  successfully  applied  to  drive  machinery,  the  water- 
falls of.  our  country  remained  unimportant  sources  of  natural 
power.  The  discovery  of  electrical  energy  and  of  methods  to 
apply  it  to  machinery  and  to  transmit  it  great  distances,  once 
more  called  attention  to  the  desirability  of  utilizing  waterfalls 
as  a  source  of  mechanical  power.  The  successful  attempt  to 
harness  Niagara  Falls  has  been  followed  with  similar  successes 
in  other  sections,  until  it  now  appears  that  it  is  only  a  question 
of  time  until  every  waterfall  in  the  country  will  be  the  seat  of 
electrical  generating  plants. 

In  recounting  the  wealth  of  our  natural  resources  we  are 
likely  to  overlook  the  fisheries,  which  are  the  basis  of  the 


LAND    (NATURAL   RESOURCES) 


121 


122  ELEMENTARY   ECONOMICS 

prosperity  of  many  localities.  The  sea  fishing  of  all  three 
coasts  is  a  profitable  industry,  giving  employment  to  thousands 
of  men  and  boys  and  furnishing  one  of  our  most  important 
suppKes  of  food.  On  the  Great  Lakes,  and  along  the  rivers  also, 
fishing  is  important.  Fortunately  for  the  fishing  industry,  the 
national  government  and  many  of  the  states  have  enacted 
laws  designed  to  prevent  waste  and  depletion.  To  that  end, 
restrictions  are  placed  as  to  the  time  and  methods  of  catching 
fish ;  and  the  stocks  of  fish  are  replenished  periodically  from 
public  hatcheries. 

28.  The  Law  of  Diminishing  Returns 

Statement  of  the  law.  —  The  most  important  economic  law 
under  the  head  of  production  is  known  as  the  "  Law  of  Diminish- 
ing Returns."  This  law  applies  ahke  to  land,  to  labor,  and  to 
capital.  Stated  in  terms  of  land  in  the  simplest  possible  maimer, 
the  law  is :  As  additional  units  of  labor  and  capital  are  applied 
to  the  utilization  of  a  given  piece  of  land,  the  increase  in  the  product 
gained  from  the  land  will  for  a  time  he  greater  than  the  increase  in 
the  number  of  units  of  labor  and  capital  expended;  after  which 
the  increase  in  the  product  will  decline. relative  to  the  increase  in 
the  number  of  units  of  labor  and  capital. 

Application  of  the  law.  —  The  operation  of  the  law  of  diminish- 
ing returns  is  best  observed  in  agriculture.  Obviously,  the  prod- 
uct to  be  gained  from  a  plot  of  land  by  one  man  unaided  by 
machinery  of  any  sort  would  be  relatively  small.  He  could,  as 
the  primitive  American  Indian  did  before  him,  scratch  the 
ground  with  a  sharpened  stick  and  cultivate  his  crops  with  a 
shell.  Given  a  strong  hoe,  it  is  hkely  that  he  could  materially 
increase  the  quantity  of  his  crop.  Thus,  step  by  step  with  the 
aid  of  horses,  improved  machinery,  drain  tile,  fertilizer,  and 
laborers  our  farmer  would  find  it  possible  for  a  time  to  increase 
the  product  of  his  land  faster  than  his  increase  in  the  apphcation 


LAND    (NATURAL   RESOURCES)  123 

of  labor  and  capital.  He  would  find  also  that  eventually  the 
product  arising  from  the  addition  of  a  unit  of  labor  and  capital 
was  less  than  the  product  arising  from  the  application  of  the 
preceding  unit.  Then  he  would  have  reached  the  point  of 
diminishing  returns.  Further  applications  of  labor  and  capital 
would  show  a  constant  decrease  in  product  attributable  to  the 
successive  units  of  labor  and  capital  employed.  Presently  the 
point  of  greatest  efficiency  would  be  reached,  which  we  may  say 
.is  the  point  where  labor  and  capital  can,  be  applied  to  the  very 
best  advantage  on  this  particular  piece  of  land. 

It  will  aid  in  understanding  this  important  law  if  we  resort 
to  a  graphic  illustration.  Suppose  a  farmer  has  a  unit  of  labor 
and  capital  which  he  applies  to  a  given  piece  of  land  with  the 
result  that  he  gets  a  product  of  8,  represented  in  Fig.  7  by  the 
letter  a.  Suppose  further  that  the  application  of  another  unit 
brings  an  additional  product  of  13  (h) ;  of  another,  16  (c) ;  of 
another,  18  (d) ;  and  of  another,  17  (e).  Clearly,  the  fifth  unit 
of  labor  and  capital  produces  less  than  does  the  fourth  unit. 
Hence,  the  point  of  diminishing  returns  is  between  these  two 
units,  at  E.  Additional  units  of  labor  and  capital  may  be 
appUed,  however,  before  the  point  of  greatest  efficiency  is 
reached.  According  to  our  assumption,  the  fifth  unit  of  labor 
and  capital  will  yield  a  product  of  17  (e),  which  is  greater  than 
can  be  had  on  new  land  similar  to  the  piece  of  land  which  we  have 
under  consideration,  for  the  product  (17)  exceeds  the  average 
product  of  the  preceding  units  /"^  +  1^  +  16  +  18  ^  ^^A 

Also,  our  farmer  will  find  it  advantageous  to  apply  a 
sixth  unit  of  labor  and  capital,  which,  we  have  assumed,  will 
yield  a  product  of  15  (/),  for. this  is  greater  than  the  average 
yield  of  the  five  units  already  applied.  The  total  product  of  the 
six  units  is  87  (8  -[-  13  +  16  +  18  +  17  +  15),  or  an  average 
of  14^  (87  T-  6).     If  similar  new.  land  is  available  he  cannot 


124 


ELEMENTARY   ECONOMICS 


afford  to  apply  a  seventh  unit  of  labor  and  capital  which  yields 
anything  less  than  14|.  He  will  not  apply  the  seventh  unit, 
which  yields  a  product  of  but  13  (gr).  The  point  of  greatest 
efficiency,  then,  is  between  units  6  and  7,  designated  in  Fig.  7 
as  G.  But  the  point  of  diminishing  returns  and  the  point 
of  greatest  efficiency  may  coincide.  Suppose  the  fifth  and 
sixth  units  of  labor  and  capital  yield  a  product  of  13  and  11 

y 


«/  Fig.  7. 

instead  of  17  and  15.  In  that  case  the  application  of  the 
fifth  unit  would  be  accompanied  by  a  decline  in  product  relative 
not  only  to  the  fourth  unit  but  also  to  the  average  yield  of  the 
four  already  applied. 

Intensive  and  extensive  margins  of  cultivation.  —  We  may 
now  notice  in  an  elementary  way  the  notions  associated  with 
intensive  and  extensive  margins  of  land  cultivation.  When 
our  farmer  has  reached  the  point  of  greatest  efficiency  (G  in 


LAND    (NATURAL   RESOURCES)  125 

Fig.  7),  he  has,  provided  the  price  for  his  product  justifies 
further  expenditures,  two  possible  courses  before  him:  he 
may  apply  additional  units  of  labor  and  capital  on  the  piece  of 
land  on  which  he  has  already  expended  6  units;  or  he  may 
apply  these  additional  units  to  another  piece  of  land.  What  is 
likely  to  be  his  action?  If  there  is  more  land  similar  in  every 
way  to  the  piece  he  is  already  cultivating  —  which  is  unlikely  — 
he  will  take  up  new  land.  If,  on  the  other  hand,  the  only  land 
available  is  inferior  to  the  piece  which  he  is  already  cultivating, 
he  will  farm  that  piece  more  intensively ;  just  how  much  more 
intensively  will  depend  on  the  relative  inferiority  of  the  avail- 
able land  compared  to  the  piece  already  under  cultivation. 

The  problems  connected  with  the  law  of  diminishing  returns, 
and  with  intensive  and  extensive  margins  of  cultivation,  have 
a  practical  significance  in  agriculture.  If  it  were  not  for  the 
operation  of  the  law  of  diminishing  returns,  all  the  wheat  which 
the  world  needs  could  be  grown  on  a  relatively  small  area  — 
on  a  city  lot,  even  in  a  common  flowerpot.  Every  farmer 
knows  that  it  is  not  profitable  beyond  a  certain  point  in  culti- 
vation to  hire  more  laborers,  to  buy  more  machinery,  or  to 
lay  more  tile ;  and  the  higher  the  wage  level,  the  higher  the 
prices  of  machinery  and  materials,  and  the  greater  the  abun- 
dance of  good  land,  the  quicker  he  decides  to  cease  adding 
capital  and  labor.  Here  is  the  explanation  of  the  extensive 
character  of  American  agriculture.  American  travelers  in 
European  countries,  returning  home  enthusiastic  over  the 
intensive  methods  of  cultivation  they  find  there,  often  criticize 
the  farmers  here  for  what  appear  to  them  to  be  careless  methods 
of  agriculture.  The  fact  is  that  the  farmer  himself  has  a  fairly 
good  idea  of  the  location  of  the  point  of  diminishing  returns  and 
the  point  of  greatest  efficiency,  even  though  he  may  never  have 
heard  of  these  terms.  In  other  words,  he  has  found  by 
experience  and  observation  that  intensive  agriculture  is  not  as 


126^ 


ELEMENTARY   ECONOMICS 


profitable  in  the  United  States  as  in  older  countries,  largely 
because  of  the  high  wage  level  and  the  abundance  of  un- 
occupied lands. 


Value  of  Different  Kinds  of  Farm  Property  in  the   United 

States:   1910. 


HUNDREDS  OF  MILLIONS  OF  DOLLARS 


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SOUTH  DAKOTA 
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LOUISIANA 

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WYOMING 

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LAND 
Q2B  BUILDINGS 

IMPLEMENTS  AND  MACHINENV 
LIVE  STOCK 


LAND   (NATURAL  RESOURCES)  127 

Application  of  the  law  to  other  kinds  of  land.  —  The  law  of 
diminishing  returns  also  operates  in  the  use  of  other  forms  of 
land,  such  as  mines  and  building  sites.  In  mining,  as  well  as  in 
agriculture,  there  is  a  point  of  diminishing  returns.  Likewise, 
there  are  intensive  and  extensive  margins  of  operation.  Every 
mine  owner  knows  that  successive  additions  of  miners  and 
machinery  will  for  a  time  increase  the  output  of  ore  at  an  ever- 
increasing  rate  of  speed.  He  knows  also  that  a  point  will  be 
reached  eventually  where  this  rate  begins  to  decline. 

Owners  of  building  sites,  like  the  owners  of  farms  and  mines, 
face  the  problem  of  determining  just  how  much  labor  and  capital 
they  should  apply  to  their  land.  Obviously,  one  would  apply 
more  on  a  piece  of  land  in  lower  New  York  City  than  on  an 
equal-sized  piece  of  land  in  an  Iowa  county-seat  town.  But  how 
much  more  ?  Shall  the  building  have  one  floor,  or  shall  it  be  a 
skyscraper?  The  piece  of  land  will  support  one  as  easily  as 
the  other.  Moreover,  we  may  say,  speaking  roughly,  that  the 
same  foundation  and  the  same  roof  will  suffice  whatever  the 
height  of  the  building.  Here,  as  it  was  in  the  case  of  agri- 
cultural land,  the  guide  is  the  relation  of  the  value  of  the  labor 
and  capital  expended  to  the  value  of  the  product.  The 
addition  of  a  second  floor  to  a  store  building  in  small  towns,  and 
a  third  or  fourth  in  moderate-sized  cities,  usually  increases 
the  rate  of  returns  to  the  land.  There  will  come  a  point,  how- 
ever, when  the  return  from  another  floor  will  show  a  decline, 
which  indicates  that  the  point  of  diminishing  returns  was. 
reached  with  the  addition  of  the  preceding  floor. 

It  will  readily  be  seen  that  the  appHcation  of  the  law  of 
diminishing  returns  to  building  sites  is  intensely  practical  not 
only  in  the  matter  of  stores  and  shops,  but  also  in  the  matter  of 
residences.  All  of  us  have  seen  costly  houses  on  cheap  lots; 
and,  conversely,  cheap  houses  occupying  costly  sites.  In  the 
first  case  the  use  of  the  land  was  intensive ;  in  the  second,  exten- 


128  ELEMENTARY   ECONOMICS 

sive.     The  importance  of  these  truths  will  become  more  evident 
when  we  take  up  the  question  of  rent. 

EXERCISES  AND   PROBLEMS 

A 

1.  Define  "land." 

2.  How  does  land  differ  from  natural  resources  ? 

3.  What  are  the  chief  factors  in  determining  the  productivity  of 
farm  land  ? 

4.  Does  the  improvement  of  rural  roads  increase  the  productivity 
of  farm  lands  through  which  they  extend?     Discuss. 

5.  Why  are  some  store  sites  more  desirable  than  others  ? 

6.  Why  is  such  a  large  portion  of  the  United  States  unimproved  ? 

7.  Why  do  farmers  resort  to  the  rotation  of  crops  ? 

8.  Why  are  store  buildings  usually  taller  in  cities  than  in  towns  or 
villages  ? 

9.  Is  there  any  relation  between  the  value  of  a  residence  site  and 
the  value  of  its  improvement  ?     Explain. 

10.  Why  would  it  not  be  profitable  for  every  farmer  to  own  and 
operate  a  farm  tractor? 

11.  How  many  clerks  should  a  merchant  employ? 

12.  How  large  should  his  stock  of  goods  be  ? 

13.  Are  there  any  limits  to  the  size  of  the  building  he  can  profit- 
ably use  ?     Explain. 

14.  What  considerations  might  cause  him  to  change  sites?  the 
size  of  his  stock  of  goods?  the  number  of  employees? 

B 

1 .  Mention  the  most  important  natural  resources  in  your  community. 

2.  What  efforts  are  being  made  in  your  community  to  conserve 
natural  resources? 

3.  Locate  on  a  map  the  more  important  regions  devoted  to  the 
production  of  wheat,  corn,  cotton,  tobacco,  rice,  sugar  cane,  coal, 
petroleum,  and  precious  metals. 

4.  What  kinds  of  crops  are  best  fitted  for  intensive  farming?  for 
extensive  farming?  Give  five  examples  of  each,  preferably  from  your 
own  neighborhood. 

5.  Discuss  the  productiveness  of  various  store  "sites,"  and  try  to 
determine  why  differences  exist. 


LAND   (NATURAL  RESOURCES)  129 

6.  Locate  the  point  of  diminishing  returns  under  conditions  assumed 
in  the  erection  of  an  office  building  as  follows : 

Cost  of  site  .  .  .  $10,000  Total  net  annual  rent  Nothing 
Cost  of  first  floor  .  8,000  Total  net  annual  rent  $1,400 
Cost  of  second  floor  5,000  Total  net  annual  rent  1,900 
Cost  of  third  floor  .  4,000  Total  net  annual  rent  2,350 
Cost  of  fourth  floor  4,000  Total  net  annual  rent  2,700 
Cost  of  roof    .     .     .       1,000     Total  net  annual  rent    2,700 

7.  Draw  a  diagram  illustrating  the  law  of  diroinishing  returns  in 
some  industry  with  which  you  are  familiar. 


1.  American  farmers  are  constantly  being  criticized  because  they 
do  not  produce  as  much  per  acre  as  Ei^lish  farmers. 

a.  Is  this  criticism  just? 

6.  If  so,  why  do  not  American  farmers  operate  more  intensively? 

c.   Are  there  limits  to  intensive  farming?     Explain. 

2.  "The  opening  of  the  Erie  Canal  affected  both  intensive  and 
extensive  agriculture  in  the  United  States." 

a.  How  was  the  average  size  of  farms  affected  ? 

6.  In  what  ways  was  the  New  England  farmer  affected? 

c.  What  was  the  effect  on  farming  methods  in  Ohio  ? 

d.  Did  the  kinds  of  crops  grown  undergo  any  changes  ?     Explain. 

3.  A  coal  operator  was  requested  by  a  government  official  during 
the  summer  of  1917  to  state  how  much  it  cost  to  mine  a  ton 
of  bituminous  coal.  His  answer  was:  "Show  me  the  mine."  Why 
could  he  not  answer  more  satisfactorily  ? 

4.  "Iowa  and  Central  Illinois  are  the  heart  of  the  best  corn- 
producing  region  in  the  world."     Comment. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  170-173. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  388-395. 
Fetter,  Economics,  Vol.  I,  pages  433-438. 
Johnson,  Introduction  to  Economics,  pages  91-105. 
Seager,  Principles  of  Economics,  pages  122-131. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  211-214,  302-306. 
Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  185,  186 ;  Vol. 
II,  pages  59-62. 


CHAPTER  X 
CAPITAL   AS   A   FACTOR   IN   PRODUCTION 

29.   Source  of  Capital 

The  surplus  above  subsistence.  —  According  to  our  definition 
capital  is  the  product  of  past  industry  used  to  further  production. 
Just  when  and  how  the  first  capital  appeared  it  is  impossible 
to  say,  difficult  even  to  imagine.  Primitive  man  working  with 
his  hands  alone  must  have  found  it  difficult  to  secure  anything 
over  and  above  bare  subsistence ;  for  even  under  the  wildest 
condition  we  can  hardly  imagine  that  food,  clothing,  and  shelter 
could  ordinarily  be  procured  in  adequate  amounts  without 
labor.  At  some  point  in  his  development,  however,  we  know 
that  he  began  to  create  capital.  Perhaps  it  was  a  bow  and  arrow 
he  made,  or  a  canoe,  or  a  snare  for  small  game,  or  a  fish  net.  But 
where  did  he  find  the  time  for  creating  this  capital?  Perhaps 
a  storm  brought  to  the  shore  a  surplus  supply-  of  fish,  or  an 
accident  placed  in  his  hands  an  extra  deer.  In  either  case  he 
would  find  it  possible  to  abstain  a  few  days  from  the  labor 
of  getting  food"  to  sustain  life.  It  is  just  as  likely,  however,, 
that  our  primitive  man,  feeling  instinctively  the  long-run  gain 
to  be  had  from  the  use  of  capital  in  production,  'onsciously 
decreased  his  volume  of  consumption,  even  going  hungry.  Thus, 
by  spending  a  part  of  each  day  in  fashioning  a  crude  tool  or 
weapon,  instead  of  spending  his  whole  time  in  hunting  or  fishing, 
he  was  able  eventually  to  create  capital.  We,  his  descendants, 
must  do  the  same  thing  today  if  capital  is  to  be  increased  or 
even  conserved,  and  the  first  step  to  that  end  is  to  be  able  to 
curb  desires  and  appetite. 

130 


CAPITAL  AS  A   FACTOR   EST   PRODUCTION         131 

Saving.  —  Merely  to  curb  desires  and  appetite  in  one  direction 
is  not  enough  if  we  permit  them  to  rim  rife  in  other  directions. 
Our  primitive  man  when  he  discovered  the  surplus  fish,  might 
very  well  have  refrained  entirely  from  labor  while  they  lasted, 
spending  his  time  in  sleep  or  in  sight-seeing.  We  can  even 
imagine  his  skimping  himself  in  the  matter  of  meat  in  order  to 
find  time  to  gather  berries  or  nuts  for  food.  Clearly,  in  neither 
case  would  he  have  created  any  capital.  Nor  should  we  under 
similar  circumstances.  A  curtailment  of  expenditures  in  one 
direction  may  or  may  not  contribute  to  an  increase  of  capital. 
We  must  not,  if  we  are  to  assist  m  the  creation  of  capital,  permit 
economy  in  the  use  of  some  goods  to  be  entirely  nulUfied  by  ex- 
travagances in  the  use  of  other  goods.  Consequently,  the 
second  step  toward  the  creation  of  capital  is  that  income  must 
exceed  outgo. 

Investing.  —  The  surplus  of  income  over  outgo  must  be  not 
only  saved  but  also  invested.  If,  after  completing  the  canoe, 
our  primitive  man  had  hidden  it  away  in  some  cave,  obviously 
it  would  not  have  been  capital ;  for  one  of  the  characteristics 
of  capital  is  its  use  to  further  production.  Likewise,  the  hoard- 
ings of  a  miser  do  not  increase  capital.  In  fact  they  tend  to 
decrease  it.  To  make  savings  effective,  therefore,  in  the  crea- 
tion of  capital,  the  saver  must  invest  them  directly  in  his  own 
business,  or  in  stocks  or  bonds,  or  indirectly  through  such  in- 
stitutions as  banks  and  building  and  loan  associations. 

The  source  of  capital^  we  are  now  prepared  to  say,  lies  three 
steps  from  the  capital  itself.  First,  the  income  must  be  above 
the  line  of  bare  subsistence  ;  second,  income  must  exceed  outgo ; 
third,  the  surplus  must  be  invested. 

The  significance  of  each  of  these  steps  becomes  apparent 
when  we  view  society  as  a  whole.  Everywhere  in  this  country 
there  are  families  with  incomes  that  do  not  permit  of  consump- 
tion above  the  line  of  subsistence.     Consequently,  they  are 


132  ELEMENTARY   ECONOMICS 

unable  even  to  take  the  first  step  toward  the  creation  of  capital, 
much  less  to  go  the  whole  journey.  Then  there  are  millions  of 
families  and  individuals  who  have  something  left  over  after 
providing  necessaries,  but  who  have  never  learned  to  save. 
They  could,  if  their  imagination  and  will  power  were  strong 
enough,  assist  in  the  creation  of  capital.  Since  they  do  not, 
their  influence  in  this  respect  is  little  if  any  greater  than  their 
less  fortunate  neighbors.  Fortunately  for  the  progress  of 
society,  there  are  other  millions  who  take  the  second  step  toward 
the  creation  of  capital  by  spending  less  than  they  earn  —  by 
saving.  Most  of  these,  experience  and  observation  teach  us, 
do  not  hoard  their  savings,  but  place  them  where  they  can  be 
utilized  by  productive  industry.  They,  and  they  alone,  are 
responsible,  under  the  present  organization  of  society,  for  the 
creation  and  accumulation  of  capital. 

30.   Nature  of  Capitalistic  Production 

Advantages  of  indirect  production.  —  Production  without 
the  aid  of  capital,  which  in  this  connection  we  will  call  direct 
production,  is  primitive  in  its  very  nature.  The  early  pioneer, 
in  Iowa  let  us  suppose,  quenched  his  thirst  for  the  first  few  weeks 
by  lying  prone  to  drink  from  a  natural  spring.  Obviously, 
under  these  conditions,  he  found  it  necessary  to  visit  the  spring 
each  time  he  felt  the  need  of  a  drink.  This  was  direct  pro- 
duction in  its  simplest  form.  Suppose,  to  continue  the  illus- 
tration, he  spent  an  hour  fashioning  some  sort  of  vessel  from 
bark  or  clay  that  would  contain  enough  water  for  the  day,  and 
that  thereby  he  saved  ten  of  the  twenty  minutes  which  he  had 
formerly  consumed  daily  in  walking  to  and  from  the  spring. 
Suppose  further  that  by  the  expenditure  of  one  day's  labor  he 
contrived  a  system  of  pipes  made  from  wild  cane  which  would 
carry  a  continuous  flow  of  water  to  his  cabin  door,  and  which 
would  relieve  him  of  any  further  labor  in  getting  water  from  the 


CAPITAL  AS  A   FACTOR   IN   PRODUCTION 


133 


MCAT  PACKINO 


spring.  Each  step  shows  the  advantage  of  indirect  production. 
In  the  first,  the  hour's  labor  was  made  good  in  six  days ;  in  the 
second,  in  a  few  months  at  most.  So  it  is  throughout  all  the 
productive  processes.  The  time  spent  in  fashioning  tools  and 
machines  ordinarily  yields  an  amount  of  goods  in  excess  of  the 
amount  which  would  have 

been  produced  had  it  been    Percentage  of  Total  Value  of  Prod- 
,.    J.       ,  1      ,•  UCTS  FOR  Leading  Industries  :  1909. 

spent  m  direct  production. 

•*■  PER  CENT 

It  is  necessary  to  qualify 
our  conclusions  with  the 
word  "  ordinarily,"  for  it 
is  easily  conceivable  that 
there  are  limits  to  the  ad- 
vantages of  indirect  pro- 
duction. If  our  Iowa 
pioneer  had  spent  days 
in  embellishing  his  water 
pipe  with  shells  and 
beads,  there  is  no  reason 
to  believe  that  it  would 
have  served  its  purpose 
any  better.  Furthermore, 
whether  or  not  the  in- 
direct method  of  produc- 
tion of  any  particular  good 
holds  an  advantage  over 
more  direct  methods,  de- 
pends in  part  on  the  avail- 
ability of  labor.  In  the  oriental  countries,  where  labor  is 
plentiful  and  cheap,  it  is  often  more  advantageous  in  trans- 
porting merchandise  to  employ  men  than  automobile  trucks. 

The  place  of  capital  in  modern  industry.  —  Since  the  in- 
direct, or  capitalistic,  method  of  production  is  ordinarily  more 


PAPER  AND  PULP 
AUTOMOBILES 
rURNITURE 

PETROLEUM,  REriNIHO 
ELECTRICAL  APPARATUS 
LIQUORS,  OISTIILCO 


COPPER,  TIN. 
CILK  C0003 


I  SHEET  IRON 


134  ELEMENTARY   ECONOMICS 

advantageous  than  the  direct  method,  it  characterizes,  as  we 
might  expect,  modem  industry,  with  its  enormous  capital,  its 
highly  developed  division  of  labor,  and  its  complicated  tools  and 
machinery.  Few  business  men  would  care  to  attempt  to  carry 
on  production  of  any  kind  by  direct  methods.  One  of  their 
chief  concerns  is  to  control  sufficient  capital  for  their  business. 
Even  farming,  which  we  are  still  likely  to  regard  as  being  carried 
on  more  or  less  directly,  has  felt  the  need  of  more  and  more 
capital  to  be  expended  for  fertilizers,  machinery,  and  buildings. 
Indirect  production  has  had  its  highest  development  in  manu- 
factures. In  another  connection  we  have  seen  how,  under 
conditions  of  excessively  large  production,  complicated  and 
costly  machinery  has  gradually  displaced  many  of  the  simpler 
direct  processes.  Such  displacements  do  not  occur  by  accident, 
and  would  not  occur  at  all  if  capitalistic  production  in  these 
particular  cases  were  not  more  efficient  than  direct  methods. 
After  all,  the  final  test  is  efficiency  and  profitableness ;  for  the 
producer,  seeking  his  own  economic  advantages,  will  employ 
those  methods  which  appear  to  him  to  be  the  best.  For  that 
reason,  capital  has  come  to  dominate  modern  industry ;  and  we 
may  expect  it  to  enjoy  an  increasing  dominance  until  the  limits 
of  indirect  productive  methods  are  reached. 

31.   Different  Kinds  of  Capital 

Fixed  and  circulating  capital.  —  Capital  may  be  classified  in 
a  variety  of  ways,  two  of  which  concern  us  here :  fixed  and 
circulating,  in  which  time  is  the  important  element ;  free  and 
specialized,  in  which  the  use  element  is  the  chief  factor. 

It  is  a  well-known  fact,  which  can  easily  be  verified  by 
observation,  that  some  forms  of  capital  —  that  is,  certain  kinds 
of  capital  goods  —  are  consumed  more  quickly  than  other  forms. 
A  piece  of  coal,  for  example,  can  be  used  but  once.  In  other 
words,  the  only  way  to  consume  coal  is  to  destroy  it  at  a  single 


CAPITAL  AS  A 'FACTOR   IN   PRODUCTION         135 

operation.  At  the  other  extreme  are  capital  goods  which  can  be 
used  almost  an  infinite  number  of  times  before  they  are  con- 
sumed. A  common  carpenter's  handsaw  has  been  known  to 
survive  fifty  years'  continual  use.  Some  machines,  too,  last 
for  years,  successfully  withstanding  the  wear  and  tear  that 
comes  from  daily  operation.  /To  the  coal  we  apply  the  term 
^^circulating  capital";  to  the  handsaw  or  machine  we  apply 
the  term  "fixed  capital. "  It  must  be  kept  in  mind,  however, 
that  both  terms  are  relative,  for  the  highest  form  of  circulat- 
ing capital  is  fixed  for  at  least  one  operation,  while  no  capital 
is  so  perfectly  fixed  as  to  last  forever. 

The  replacement  fund.  —  The  length  of  time  and  the  number 
of  operations  that  any  piece  of  capital  good  lasts  are  of  prime 
importance  relative  to  its  replacement  fund,  which  is  the  capital 
that  must  be  accumulated  to  provide  for  wear  and  tear.  Let  us 
suppose  that  a  factory  equipped  with  teii  machines  consumes 
five  tons  of  coal  daily.  At  the  close  of  the  day  the  five  tons  of 
coal,  having  been  consumed,  will  need  to  be  entirely  replaced. 
The  machines,  on  the  other  hand,  possessing  a  relatively  high 
degree  of  fixity,  are  ready  for  the  next  day's  work.  Thus,  day 
after  day  the  coal  supply  is  replenished,  while  the  machines 
with  only  minor  repairs  may  last  for  years.  Each  day  the 
enterpriser  finds  it  necessary  to  set  aside  a  replacement  fund 
large  enough  to  buy  five  tons  of  coal,  while  the  replacement  fund 
necessary  to  cover  the  wear  and  tear  of  each  machine  may  be  but 
a  few  cents.  If  we  should  view  the  whole  factory,  we  would 
find  that  every  piece  of  equipment  and  bit  of  raw  material  con- 
sumed in  making  finished  products  are  more  or  less  fixed  in  their 
nature  and  more  or  less  circulating,  some  being  consumed  with 
a  single  operation,  some  lasting  for  years,  but  all  provided  for 
in  the  replacement  fund. 

It  is  well  to  remember  in  this  connection  that  it  is  the  replace- 
ment fund  which  permits  the  shifting  of  capital  from  one  group 


136  ELEMENTARY   ECONOMICS 

of  industries  to  another.  We  have  already  noticed  that  the 
American  industrial  revolution  was  characterized  by  a  change 
from  commerce  to  manufactures.  Obviously,  the  owners  of 
ships  could  not  utilize  such  forms  of  capital  goods  as  hulks, 
sails,  masts,  and  anchors  in  the  making  of  cloth.  They  did, 
however,  have  available  replacement  funds  which  they  had 
accumulated  in  the  form  of  money  to  replace  the  vessels  as  they 
became  unseaworthy.  Thus,  the  owner  of  an  old  ship  that  was 
almost  worn  out  had  a  relatively  large  replacement  fund,  while 
at  the  other  extreme  was  the  owner  whose  vessel  had  not  even 
yet  made  its  maiden  voyage.  The  enterpriser,  therefore,  has, 
or  ought  to  have,  a  replacement  fund  at  all  times,  its  relative 
size  depending,  among  other  things,  on  the  condition  of  his 
equipment  —  that  is,  as  business  men  say,  on  the  state  of  repairs. 

Free  and  specialized  capital.  —  Here  again,  as  in  the  case 
of  fixed  and  circulating  capital,  we  are  compelled  to  deal  with 
relative  terms.  No  capital  is  entirely  free,  and  only  on  rare 
occasions  do  we  find  capital  so  highly  specialized  as  to  be  en- 
tirely worthless  for  any  other  use.  Free  capital  may  be  defined 
as  capital  which  serves  a  variety  of  uses  ;  specialized  capital,  as 
capital  which  serves  but  few  uses.  For  purposes  of  illustration 
take  two  common  farming  implements.  The  plow  is  used  in 
preparing  the  ground  for  all  kinds  of  crops,  while  the  hay  rake 
is  practically  worthless  in  gathering  any  other  crop.  For  the 
sake  of  convenience  of  expression  we  call  one  free  capital,  the 
other  specialized  capital.  Sometimes,  however,  capital  is  said 
to  be  free  when  it  can  be  used  for  entirely  different  purposes. 
Coal,  for  example,  may  be  used  to  generate  steam,  or  to  heat  a 
building,  while  it  is  improbable  that  a  second  use  could  be 
found  for  a  nutmeg  grater. 

There  is  a  close  relation  between  free  and  specialized  capital 
on  the  one  hand,  and  the  rate  of  interest  on  the  other.  Free 
capital,  as  a  general  rule,  earns  a  lower  interest  rate  than  does 


CAPITAL  AS  A  FACTOR  IN   PRODUCTION         137 

specialized  capital,  simply  because  the  risk  of  losing  the  invest- 
ment is  less.  Suppose  two  men  contemplate  the  expenditure 
of  equal  amounts  of  money  in  two  buildings,  one  a  store  build- 
ing adaptable  to  almost  any  kind  of  merchandising,  the  other  a 
moving-picture  building  with  highly  decorated  interior,  with  a 
stage,  and.  with  an  elevated  floor.  Plainly  the  risk  involved, 
other  things  being  equal,  in  getting  tenants  wotild  be  less  in  the 
case  of  the  first  building  than  in  the  case  of  the  second.  The 
first  could  be  utilized  in  various  ways;  the  second,  unless 
extensive  alterations  are  made,  is  likely  to  prove  useless  for 
any  purpose  other  than  moving-pictures.  Knowledge  of  these 
facts  causes  investors  to  demand  a  higher  interest  rate  in  one 
case  than  in  the  other,  and  in  the  long  run  they  secure  their 
demands. 

Gold  is  not  a  free  capital  good.  —  Because  of  its  universal 
acceptability  gold  is  often  mistakenly  spoken  of  as  free  capital. 
Such  is  not  the  case,  however,  in  the  sense  in  which  we  have 
just  used  the  word  "  free."  Aside  from  its  utilization  in 
jewelry  and  watch  cases  and  in  dentistry  we  seldom  in  our  every- 
day experiences  see  gold  used  as  a  capital  good ;  compared  with 
iron  or  copper  the  number  of  ways  in  which  it  can  be  utilized 
is  small.  For  that  reason  it  is  specialized  rather  than  free. 
It  has,  however,  a  high  degree  of  exchangeability,  since,  as  we 
have  seen,  it  flows  freely  from  hand  to  hand  because  it  is  univer- 
sally desired. 

.  Individual  and  social  capital.  —  In  our  ordinary  thinking  we 
seldom  go  beyond  the  notion  of  individual  capital  —  that  is, 
capital  possessed  and  directed  by  individuals.  Society,  also, 
[has  considerable  capital  which  is  of  no  small  amount  and  im- 
portance. Factories  and  department  stores  install  automatic 
sprinklers,  which  we  agree  at  once  is  capital.  Sprinklers  lessen 
the  fire  hazard.  So  does  the  city  fire  department  with  its 
heavy  investment  in  buildings,  trucks,  ladders,  and  other  equip- 


138  ELEMENTARY   ECONOMICS 

ment.  Both  serve  the  same  purpose;  both  represent  capital 
investment,  one  by  individuals,  the  other  by  society.  In  extend- 
ing this  notion  we  find,  for  example,  that  government  buildings 
with  their  furnishings  and  equipment  parallel  individual  capital 
investments  designed  to  furnish  the  same  or  similar  services, 
and  as  such  they  are  capital. 

EXERCISES  AND   PROBLEMS 
A 

1.  What  was  the  origin  of  capital? 

2.  Name  the  three  steps  necessary  to  create  capital. 

3.  Are  any  individuals  or  groups  unable  to  take  these  steps? 
Explain. 

4.  Which  is  the  more  useful  member  of  society,  a  miser  or  a 
spendthrift? 

5.  Why  is  capitalistic  production  said  to  be  roundabout  or  indirect  ? 

6.  What  are  the  advantages  of  indirect  production  over  direct 
production? 

7.  How  does  the  replacement  fund  give  mobility  to  capital  ? 

8.  Explain  how  a  carpenter's  hammer  replaces  itself. 

9.  What  has  become  of  the  large  amount  of  capital  formerly  used 
in  the  buggy  and  carriage  industry? 

10.  Is  any  capital  completely  fixed?     Explain. 

11.  Where  should  the  line  be  drawn  between  fixed  and  circulating 
capital?  between  free  and  specialized  capital? 

12.  Why  should  specialized  capital  yield  a  larger  income  than  free 
capital  ? 

13.  Just  why  is  gold  a  highly  specialized  form  of  capital  ? 

14.  Name  some  forms  of  social  wealth. 

B 

1.   Call  to  mind  persons  in  your  community  who  contribute  to  the 
supply  of  capital. 

a.  Are  all  of  them  relatively  well-to-do? 

h.  Which,  if  any,  appear  to  sacrifice  unduly  in  order  to  save? 

c.  Which  are  normally  thrifty  ? 

d.  Have  any  adopted  definite  plans  for,  saving  ? 

e.  What  advice  has  any  of  them  to  offer  in  the  matter  of  saving? 


CAPITAL  AS  A   FACTOR   IN   PRODUCTION         139 

2.  Imagine,  if  you  can,  a  general  return  to  direct  methods  of  pro- 
duction. 

a.  How  would  civilization  be  affected? 

h.  Would   the   volume   of   production   be   greater   or   smaller? 
Explain. 

c.  Would  individuals  and  groups  be  more  or  less  self-sufficing? 

Explain. 

d.  Would  people  have  more  or  less  leisure  time?     Why? 

e.  How  would  such  a  change  affect  public  education  ? 

/.   Name  some  industries  that  would   be  likely  to  suffer   the 
most. 

3.  Many  tasks,  such  as  digging  ditches,  cleaning  streets,  and  carry- 
ing brick  and  mortar,  are  usually  performed  by  direct  methods. 

a.  Could  capitalistic  methods  be  employed?     How? 
6.  Why  are  they  not  usually  employed? 

c.  Under  what  conditions  are  they  sometimes  employed  ? 

d.  Does  there  appear  to  be  any  relation  between  capitalistic 

methods  and  the  law  of  diminishing  returns  ?     Explain. 

4.  Classify  the  capital  in  some  industry  with  which  you  are  familiar 
into  free,  specialized,  fixed,  and  circulating. 

5.  Suppose  a  certain  individual  invests  $10,000  in  a  store  site  and 
building ;  also  an  equal  amount  in  another  site  and  building  utilized 
by  the  state  as  an  armory  for  a  company  of  militia.  Which  -should 
normally  earn  the  larger  return?     Why? 

6.  Prepare  a  list  of  various  forms  of  social  capital.  Show  how  each 
item  in  the  list  lessens  the  need  for  greater  individual  wealth. 


1.  "The  corporative  form  of  industry  has  been  a  big  factor  in  the 
saving  and  investing  of  capital."  Explain  with  some  detail  how  this  is 
■true. 

2.  Socialists  usually  claim  that  labor  is  the  source  of  all  wealth, 
o.  Can  wealth  be  created  without  labor?     How? 

6.  Can  capital  create  wealth  without  the  assistance  of  labor? 

How? 
c.  How  would  the  destruction  of  all  wealth  affect  the  efficiency 

of  labor? 

3.  "With  the  extension  of  capitalistic  methods  of  production  the 
proportion  of  fixed  and  specialized  capital  goods  shows  a  tendency  to 
increase." 


140  ELEMENTARY   ECONOMICS 

o.  Is  this  statement  true? 

b.  Why  is  it  true  ? 

c.  Why,  or  why  not,  is  this  proportion  likely  to  increase? 

d.  Under  what  conditions  might  it  decrease  ? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  131-141. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  119-122. 
Fisher,  Elementary  Principles  of  Economics,  pages  37-59. 
Johnson,  Introduction  to  Economics,  pages  192-214. 
Seager,  Principles  of  Economics,  pages  140-152. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  313-328. 
Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  67-85. 


CHAPTER  XI 

COMPETITION    VERSUS   MONOPOLY 

32.   Impetus  of  Competition 

The  doctrine  of  laissez  faire.  —  Business  men  and  public 
officials  for  centuries  held  the  view  that  business  could  best 
be  conducted  if  minutely  regulated  by  the  government.  To  that 
end  the  various  nations  granted  monopolies  of  all  sorts,  regulated 
the  relation  between  masters  and  their  workmen,  and  restricted 
the  exportation  of  money  and  raw  products  to  foreign  lands. 
This  was  the  period  of  mercantilism  —  that  is,  a  period  of  state 
regulation  of  business.  There  were  some  leaders,  however,  who 
believed  that  state  interference  was  more  detrimental  than 
helpful,  and  that  better  industrial  results  could  be  attained  by 
permitting  each  individual  to  pursue  his  own  economic  advan- 
tage. The  first  widely-read  expression  of  this  new  doctrine, 
the  doctrine  of  laissez  faire,  was  given  to  the  world  by  Adam 
Smith,  in  1776»,  in  an  epoch-making  work  entitled  the  Wealth  of 
Nations. 

Since  that  time  these  two  conflicting  views  have  contested 
for  supremacy  in  the  minds  of  men.  Mercantilism  —  state 
regulation  of  business  —  has  stubbornly  given  way  '  to  its 
younger  rival,  though  it  still  lingers  in  such  form  as  the  pro- 
tective tariff ;  and  it  would  not  be  at  all  surprising  if  it  should 
regain  its  second  youth.  We  may  say,  however,  that  business 
in  general  in  the  United  States  is  characterized  by  the  principle 
of  laissez  faire,  or,  to  use  a  more  common  expression,  competition. 
Here  each  business  man  is  permitted,  with  a  minimum  of  state 

141 


142 


ELEMENTARY   ECONOMICS 


Fac-simile  Extract  from  Smith's  Wealth  of  Nations. 


INQUIRY  INTO  THE  NATURE  AND  CAUSES 

OP   THE 

WEALTH  OF  NATIONS. 


BOOK  L 
CHAPTER     Xr. 

Of  the  Rent  of  Land, 

Rent,  considered  as  the  price  paid  for  the  use  of 
land,  is  naturally  the  highest  which  the  tenant  can 
afford  to  pay  in  the  actual  circumstances  of  the  land. 
In  adjusting  the  terms  of  the  lease,  the  landlord  en- 
deavours to  leave  him  no  greater  share  of  the  pro- 
duce than  what  is  sufficient  to  keep  up  the  stock 
from  which  he  furnishes  the  seed,  pays  the  labour, 
and  purchases  and  maintains  the  cattle,  and  other 
instruments  of  husbandry,  together  with  the  ordinary 
profits  of  farming  stock  in  the  neighbourhood.  This 
is  evidently  the  smallest  share  with  which  the  tenant 
can  content  himself  without  being  a  loser,  and  the 
landlord  seldom  means  to  leave  him  any  more. 
Whatever  part  of  the  produce,  or,  what  is  the  same 
thing,  whatever  part  of  its  price,  is  over  and  above 

VOL.  II.  B 


COMPETITION    VERSUS  MONOPOLY  143 

interference,  to  decide  his  own  policy,  to  buy  and  sell  to  the  best 
advantage,  and  to  conduct  his  business  as  he  thinks  advisable. 
Here  the  state  makes  no  effort  to  regulate  his  business  activities 
so  long  as  public  welfare  is  not  endangered.  Under  normal 
conditions  it  has  no  concern  with  the  details  of  his  business, 
with  the  source  of  his  raw  materials,  with  the  volume  of  his 
output,  or  with  the  prices  of  his  product.  Consequently,  any 
one  in  the  United  States  can  move  about  at  his'  convenience, 
seek  employment  anywhere,  and  engage  in  almost  any  business 
for  which  he  is  equipped. 

Competition  and  improvement.  —  The  chief  economic  argu- 
ment for  competition  is  that  it  serves  as  the  basis  of  business 
improvement  and  business  development.  Who  has  not  heard 
the  common  saying,  "Competition  is  the  life  of  trade"? 
Spurred  on  by  competitors  the  business  man  seeks  better  sources 
of  raw  materials,  better  methods  in  production,  and  better 
markets ;  which  in  almost  every  case  means  higher  quality  and 
lower  prices.  Under  the  pressure  of  competition  he  substitutes 
new  and  better  methods  for  old  ones,  and  if  he  is  to  succeed,  he 
must  not  only  be  alert  to  the  improvements  of  his  competitors, 
but  also  he  must  on  his  own  initiative  institute  improvements 
of  his  own. 

The  business  world  is  hterally  alive  with  industrial  improve- 
ment. Large  manufacturers  maintain  expensive  laboratories 
where  their  competitors'  products  as  well  as  their  own  are 
carefully  tested  for  excellence ;  where  experiments  are  carried 
on  with  the  single  purpose  of  improvement.  Railroads,  too,  are 
alive  to  any  change  that  will  improve  their  service.  Competing 
lines  fight  for  supremacy  in  the  matter  of  speed,  of  comfort,  and 
of  safety.  They  employ  high-priced  engineers  to  study  the  pull- 
ing power  of  engines,  the  effect  of  speed  on  rails  and  roadbed, 
and  the  advantages  to  be  gained  by  straightening  tracks  and 
cutting  down  grades.     They  experiment  with  different  kinds  of 


144  ELEMENTARY   ECONOMICS 

fuel,  and'  with  different  makes  of  engines  and  cars.  Even 
among  farmers  competition  leads  to  improvement  in  the  quality 
of  seed,  in  cultivation,  in  stock-raising,  in  harvesting,  and  in  a 
variety  of  other  ways'.  For  most  of  us  the  best  examples  of  the 
influence  of  competition  on  improvenient  are  found  in  the  retail 
trade.  One  grocer  installs  a  large  sanitary  refrigerator,  another 
replaces  his  old  horse-driven  delivery  wagons  with  automobile 
trucks,  while  a  third  makes  arrangements  to  permit  his  cus- 
tomers to  wait  on  themselves  as  far  as  possible.  At  the  bottom 
of  each  change  is  the  desire  to  geit  more  business.  The  first 
has  an  advantage  in  handling  perishable  goods,  the  second  cuts 
the  expense  of  delivery,  while  the  third  is  able  to  reduce  his 
number  of  clerks.  In  the  end  many  other  grocers,  unwilling  to 
be  bested  by  competitors,  adopt  these  innovations.  Thus  in 
its  endless  round  industrial  improvement  goes  on  its  way  stim- 
ulated by  the  force  of  competition. 

Wastes  of  competition.  —  Competitive  methods  often  show  a 
loss,  however,  which  society  should,  and  will  in  time,  eliminate. 
Spurred  on  by  a  desire  to  increase  trade,  competitors  sometimes 
uselessly  duplicate  plants  and  equipments,  with  the  result  that 
society  must  pay  more  for  their  particular  goods  than  would 
otherwise  be  the  case.  Delivery  of  milk  in  cities  is  a  common 
example  of  this  waste.  Not  infrequently  as  many  as  a  half 
dozen  milk  drivers  visit  the  same  apartment  house  in  the  course 
of  the  early  morning  hours,  the  combined  service  being  little 
greater  than  that  which  one  driver  could  have  rendered  in  the 
same  time.  Recent  investigations  of  the  conditions  surrounding 
the  deUvery  of  milk  in  a  large  Middle  Western  city  disclose  the 
interesting  fact  that  the  cost  of  delivery  from  city  milk  stations 
to  the  homes  is  greater  than  the  combined  cost  of  producing  the 
milk  and  shipping  it  to  the  city.  We  may  see  similar  wastes  in 
a  duplication  of  small  stores,  each  with  its  staff  of  clerks  and 
its  delivery  system  working  but  part  time. 


COMPETITION    VERSUS  MONOPOLY  145 

Society  has  already  made  much  progress  in  the  matter  of 
waste  prevention,  by  facing  squarely  the  fact  that  some  indus- 
tries by  their  very  nature  are  monopolistic  in  character  and  not 
competitive.  As  a  result  few  cities  "have  duplicate  water 
stations,  electric  lighting  systems,  or  artificial  gas  plants. 
Usually  also  one  street  railway  system  suffices.  Competition 
between  telephone  systems  still  persists  in  some  localities. 
Obviously,  the  duplication  of  an  electric  lighting  system  would 
be  a  social  waste,  especially  if  some  means  other  than  competi- 
tion can  be  made  an  effective  regulator  of  service  and  price. 
Such  means  have  been  found  in  positive  legislation  in  which  the 
benefits  of  competition  are  gained  without  the  loss  arising  from 
duplication  of  plants,  equipment,  and  labor  force. 

33.   The  Law  of  Monopoly  Price 

Getting  the  largest  net  return.  —  The  feeling  prevails  that  a 
monopolist  will  always  sell  his  goods  at  the  highest  price.  On 
the  contrary,  he  sells  them  at  that  price  which  brings  him  the 
largest  net  return,  whether  that  price  be  high  or  low.  He  is 
concerned  not  only  in  price,  but  also  in  the  number  of  units  sold. 
In  pursuing  his  economic  advantage,  therefore,  he  would  set  the 
price  with  due  regard  for  demand;  for,  as  we  have  already 
learned,  an  increase  in  price  lowers  demand  while  a  decrease 
causes  demand  to  rise. 

The  operation  of  the  law  of  monopoly  price  is  best  observed 
in  connection  with  goods  which  have  an  elastic  demand ;  and 
which  are  produced  under  conditions  of  decreasing  costs  — 
that  is,  under  conditions  in  which  the  unit  cost  of  production 
decreases  as  the  number  of  units  produced  is  increased.  Assum- 
ing, for  illustrative  purposes,  that  the  manufacturer  of  a  certain 
brand  of  toilet  soap  is  a  monopolist,  we  can  work  out  concretely 
his  problem  of  fixing  the  price. 


146 


ELEMENTARY   ECONOMICS 


No.  OF  Cakes 
Sold 

Cost  per 
Cake 

Gross  Cost 

SeIiLINO 

Price  per 
Cake 

Gross 
Receipts 

Net  Profits 

20,000 

20^ 

$    4,000 

80^ 

$  16,000 

$12,000 

50,000 

18^ 

9,000 

50  ?f 

25,000 

16,000 

100,000 

15^ 

15,000 

40^ 

40,000 

25,000 

300,000 

U^ 

42,000 

25^ 

75,000 

33,000 

1,000,000 

10^ 

100,000 

15?f 

150,000 

50,000 

3,000,000 

8ff 

240,000 

10^ 

300,000 

60,000 

5,000,000 

7^ 

350,000 

8^ 

400,000 

50,000 

8,000,000 

61^ 

520,000 

6^ 

480,000 

40,000  (loss) 

An  examination  of  these  figures  shows  that  our  soap  monop- 
olist would  fix  the  selling  price  at  10  cents,  not  because  that 
was  the  highest  price  he  could  get  nor  because  he  could  sell  the 
largest  number  of  cakes  at  that  price,  but  rather  because  at 
that  price  he  can  reap  the  greatest  reward. 

A  second  consideration  which  the  monopolist  must  keep 
clearly  in  mind  is  that  his  monopoly  consists  in  controlling  the 
supply  and  not  the  demand  —  that  is,  that  he  has  no  control 
over  demand  except  through  price.  Consequently,  a  monop- 
olist must  take  care  in  fixing  the  price  of  his  good,  for  if  he 
places  it  too  high  his  entire  output  will  not  be  demanded ; 
if  too  low,  he  loses  profit.  -  Occasionally,  a  monopoly,  like  the 
South  African  Diamond  Company,  is  so  secure  in  its  dominating 
position  as  to  be  able  to  withhold,  if  prices  are  too  low,  portions 
of  its  products  from  the  market.  Such  a  practice,  however, 
would  be  impossible  among  most  monopolists,  for  the  simple 
reason  that  competition  might  arise  or  the  goods  withheld 
might  decay.  We  may  conclude,  then,  that  the  mere  fact  that 
a  certain  good  is  in  the  hands  of  a  monopolist  is  not  conclusive 
proof,  as  most  people  think,  that  the  good  will  command  a 
higher  price  than  if  in  the  hands  of  numerous  competitors. 


COMPETITION    VERSUS  MONOPOLY  147 

Supplying  different  demands.  —  It  often  happens  that  a 
monopoHst  can,  by  changing  sUghtly  the  character  of  his  prod-, 
uct,  supply  different  demands  at  different  prices.  Recurring 
to  our  soap  manufacturer,  let  us  suppose  that  instead  of  making 
only  one  kind,  as  we  have  assumed,  he  makes  five  kinds  differing 
only  in  shape,  color,  or  scent.  It  is  entirely  probable  that  he 
could  sell  his  output  at  five  different  prices ;  those  most  highly 
scented,  let  us  say,  at  the  highest  price,  and  so  on  down  until 
the  lowest  price  is  reached  with  the  unscented  cakes.  More 
familiar  illustrations  of  this  principle  are  found  in  the  publi- 
cation of  certain  kinds  of  books.  Ordinarily,  the  earher  editions 
of  books  of  fiction  are  sold  at  high  prices.  Later  so-called 
popular  editions  are  issued  at  half  price  or  even  less.  The 
reading  material  is  exactly  the  same,  and  occasionally  no  great 
change  is  made  in  the  quality  of  paper  or  binding.  Publishers 
know  that  there  is  a  demand  for  the  book  at  the  standard 
price.  They  know  also  that  many  readers  do  not  have  demands 
at  that  price.  Hence  they  supply  each  demand  successively, 
beginning  at  the  top,  unless,  as  is  sometimes  the  case,  they  make 
a  show  of  supplying  several  demands  at  once  by  issuing  different 
editions  that  appear  to  be  very  much  unlike  in  printing  and 
binding.  Any  peddler  knows  that  in  many  cases  the  only  way 
to  sell  an  article  at  a  discount  to  one  housewife  without  losing 
the  custom  of  her  neighbors  is  to  mar  it  in  some  manner  so  as 
to  decrease  its  apparent  utiUty.  To  use  a  common  business 
expression,  ''  one  of  the  tricks  of  the  trade  "  which  the  monop- 
olist must  learn  is  to  be  able  to  classify  rather  accurately  the 
different  demands  for  his  product  and  to  meet  these  demands. 

34.  Limitations  on  Monopolists 

Dangers  from  competition.  —  It  would  be  incorrect  to  gain 
an  impression  from  what  has  just  been  said  that  the  monopoUst 
has  nothing  to  fear,  or  that  he  can  always  fix  a  price  that  will 


148  ELEMENTARY   ECONOMICS 

bring  him  the  largest  net  reward  irrespective  of  outside  in- 
fluences. Three  Umitations  tend  to  keep  the  monopoHst  from 
going  beyond  reasonable  bounds  in  deaUng  with  the  public : 
(1)  competition,  (2)  substitution,  (3)  legal  interference. 

No  monopolist  is  ever  free  from  the  dangers  of  competition, 
and  the  more  excessive  his  exactions  the  greater  the  danger. 
In  a  highly  developed  industrial  country  like  the  United  States, 
capable  business  men  are  constantly  on  the  alert  to  engage  in 
profitable  undertakings.  They  quickly  sense  the  source  of 
high  returns,  and  no  risk  is  too  great  for  them  to  take  if  the 
promised  reward  is  sufficiently  large.  The  history  of  American 
industry  furnishes  numerous  examples  of  successful  attempts  on 
the  part  of  competing  enterprisers  to  secure  trade  from  monop- 
olies; and  oftentimes  these  struggles  between  giants  have 
developed  into  bitter  trade  wars  featured  by  excessive  price- 
cutting.  At  one  time  the  sugar  trust  found  its  way  blocked  by 
a  combination  of  independent  refineries;  the  history  of  the 
Standard  Oil  Company  is  characterized  by  its  struggles  with 
independent  rivals;  while  the  steel  trust  has  found  effective 
competition  at  the  hands  of  the  Bethlehem  Steel  Company. 
No  monopoly,  whatever  its  financial  strength  and  prestige  may 
be,  is  justified  in  feeling  its  position  to  be  secure  against  success- 
ful competition,  for  a  new  invention  or  some  other  unforeseen 
occurrence  may  give  a  watchful  rival  an  opportunity  to  secure 
a  portion  of  its  business. 

Dangers  from  substitution.  —  Monopolists  must  also  take 
into  account  the  pdwer  of  consumers  to  substitute  one  good  for 
another.*  Usually  as  the  price  of  a  good  rises,  those  consumers 
who  are  on  or  near  the  margin  cast  about  for  a  substitute,  since 
it  is  but  a  question  of  time,  if  prices  continue  upward,  until 
their  demand  for  that  particular  good  will  be  nothing  more  than 
a  desire ;  that  is,  their  demand  will  have  lost  its  effectiveness. 
Examples  of  the  substitution  of  one  good  for  another  because  of 


COMPETITION    VERSUS  MONOPOLY  149 

a  rise  in  price  are  numerous  and  easily  found,  particularly  in 
the  matter  of  food  and  clothing.  Who  has  not  seen  a  sub- 
stitute for  butter,  for  eggs,  for  leather,  or  for  furs?  The  first 
year  of  the  Great  War  taught  Americans  more  aboujt  substitutes 
than  they  had  ever  known  before.  Until  that  time  millions  of 
people  were  scarcely  more  than  on  speaking  terms  with  bread 
made  of  com  meal,  few  knew  the  possibiUty  of  molasses  for 
sweetening  purposes,  while  scarcely  one  had  ever  dreamed  that 
honey  could  be  made  from  milk.  Aside  from  government 
requirement,  the  chief  cause  for  these  substitutions  was  high 
prices,  and  here,  as  is  always  the  case,  "  necessity  was  the  mother 
of  invention." 

Substitution  and  competition  as  checks  on  monopoUes  cannot 
be  entirely  divorced.  Independent  enterprisers  are  eager,  not 
only  to  attack  the  monopoUst  directly  in  his  own  field,  but  also 
to  attack  him  indirectly  by  offering  his  customers  substitutes. 
Thus,  cement  manufacturers,  in  so  "ar  as  their  product  is  a 
substitute  for  iron  and  steel,  compete  just  as  truly  with  the  steel 
trust  as  does  the  Bethlehem  company ;  and  they  in  turn  must 
meet  the  competition  of  manufacturers  of  artificial  plaster 
board.  The  methods  adopted  by  manufacturers  of  substitute 
goods  to  push  their  product  are  significant.  The  maker  of  an 
egg  substitute,  for  example,  is  not  content  to  declare  that  his 
product  is  equal  in  every  respect  to  fresh  eggs.  He  goes  further, 
by  placing  in  the  hands  of  housewives  all  sorts  of  cooking  recipes 
in  which  the  egg  substitute  can  be  used  to  advantage. 

Dangers  from  government  regulation.  —  A  monopolist  still 
has  cause  to  worry  even  though  he  be  secure  from  competitors 
and  his  product  be  free  from  the  competition  of  substitutes. 
Despite  the  doctrine  of  laissez  faire,  society  through^government 
sets  limits  beyond  which  monopoly  may  not  go.  It  undertakes, 
when  all  other  methods  have  failed,  to  curb  exorbitant  rewards 
and  unfair  practices.    In  fact,  as  we  have  already  seen,  the 


150  ELEMENTARY   ECONOMICS 

people  of  the  United  States  have  firmly  concluded  that  there  is 
no  possibility  of  some  industries  being  regulated  eit'  er  by 
competition  or  by  substitution.  Accordingly,  in  these  cases  the 
people  have,  turned  to  government  regulation.  For  many  years 
the  opinion  prevailed  in  the  United  States  that  the  best  way  to 
control  a  railroad  was  to  encourage  the  building  of  competing 
lines.  In  time  it  was  seen  that  such  a  plan  was  not  only  in- 
adequate but  also  undesirable.  Then  it  was  proposed  that  the 
government  should  provide,  not  competing  railroads,  but  sub- 
stitute transportation  lines  in  the  form  of  canals.  This  too  was 
put  aside  as  impracticable.  Then  society  met  the  issue  squarely 
by  declaring  that  the  government  alone  possessed  the  power  to 
compel  the  railroads  of  the  country  to  conduct  their  business  so 
as  to  furnish  efficient  and  reasonably  priced  service. 

While  the  regulation  of  railroads  is  the  most  outstanding 
example  of  the  government's  power  in  this  respect,  it  has 
been  effectively  exerted  against  the  trusts.  And  there  is  no 
reason  to  believe,  should  occasion  arise,  that  the  federal  govern- 
ment would  hesitate  to  exert  its  authority  against  any  other 
monopolies.  Because  of  past  experiences  and  future  possibilities, 
monopolists  are  wise  to  conduct  their  business  somewhere  near  a 
competitive  basis. 

Concealment  of  monopolistic  returns.  —  As  we  might  expect, 
the  monopolist  fearful  of  attack  from  these  directions  often 
attempts  to  hide  excessive  returns.  He  may  pay  himself,  and 
even  to  relatives,  salaries  out  of  all  proportion  to  the  market 
value  of  their  abilities.  Or,  as  is  more  often  the  case,  he  can 
inflate  the  capital  stock  of  his  business  in  order  that  it  may 
appear  to  be  earning  but  a  nominal  return,  whereas  the  return 
based  on  the  actual  capital  investment  may  be  excessive.  Or 
again  he  may  organize  dummy  corporations  to  which  he  pays 
large  amounts  of  money  for  some  trifling  service.  Whatever 
method  he  may  employ,  the  end  in  view  is  the  same :    the 


> 


COMPETITION    VERSUS  MONOPOLY  151 

concealment  of  excessive  returns  which  might  tempt  competitors 
or  the  government  to  step  in  and  force  a  reduction  of  prices. 

^  EXERCISES  AND   PROBLEMS 


1.  What  is  the  difference  between  laissez  faire  and  mercantilism? 

2.  Why  should  the  government  desire  to  regulate  industry  ? 

3.  Who  was  Adam  Smith? 

4.  Why  is  he  often  referred  to  as  the  "father  of  economics"? 

5.  What  is  the  relation  between  competition  and  industrial  im- 
provement ? 

6.  What  are  some  of  the  wastes  of  competition? 

7.  State  the  law  of  monopoly  price. 

8.  Why  is  the  monopolist  primarily  concerned  with  the  largest  net 
return? 

9.  What  limitations  are  placed  on  monopoly  price? 

10.  How  does  a  monopoly  come  into  existence? 

11.  Is  monopoly  synonymous  with  big  business? 

12.  Which  monopoUst  would  have  the  most  power  in  fixing  price, 
and  why : 

a.  The  one  dealing  in  necessities? 
6.  The  one  dealing  in  luxuries? 

B 

1.  Notice  carefully  how  several  competing  retailers  in  the  same 
line  carry  on  their  businesses. 

a.  Which  has  the  best  site? 

b.  Which  has  the  largest  stock  of  goods? 

c.  Which  has  the  most  attractive  window  displays? 

d.  Which  has  the  most  efficient  delivery  system? 

e.  Which  advertises  the  most  extensively? 

/.   Why  does  not  some  one  of  them  combine  all  these  good  points 

in  his  business? 
g.  What  would  be  the  result  if  he  did  so? 

2.  Observe  the  wastes  of  competition  in  retailing  arising  from  dupli- 
cated efforts  in  the  matter  of  delivery,  advertising,  rents,  lighting, 
and  heating. 


152  ELEMENTARY   ECONOMICS 

a.  Suggest  ways  to  eliminate  any  of  these  wastes. 

b.  Would  you  suggest  government  regulation?     Why,  or  why 

not? 

c.  What  attempts  are  Tieing  made  in  your  community  to  eliminate 

wastes  of  competition? 

3.  Do  you  know  of  any  former  competitive  industry  that  is  now 
monopolistic  ?     If  so,  did  the  change  affect  prices  ?     How  ? 

4.  Make  a  list  of  former  monopolies  which  do  not  now  exist. 
a.  Did  they  become  insolvent?     If  so,  why? 

h.  Did  they  change  to  competitive  conditions?     Why? 

5.  Suppose  you  were  a  watchcase  manufacturer. 

a.  At  what  point  would  you  fix  the  price  of  your  product  ? 

b.  Would    you    manufacture    different   grades    of    watchcases? 

Why,  or  why  not? 

c.  How  would  you  meet  any  competition  that  might  arise  ? 

6.  Suppose  you  conducted  a  monopolistic  business  with  a  capital 
of  $100,000.  If  your  net  income  from  the  business  was  $75,000  a  year, 
how  could  you  make  the  return  appear  to  be  much  less? 


1.  Disciiss  the  common  saying  that  "competition  is  the  life  of 
trade." 

2.  "The  monopolist  has  it  in  his  power  to  fix  prices  at  whatevet 
point  it  suits  his  fancy." 

o.  May  the  monopolist  ignore  demand  ?     Explain. 

b.  Can  the  monopolist  control  demand?     Explain. 

c.  Are  high  prices  alway   the  most  advantageous  to  the  monop- 

olist?    Why,  or  why  not? 

d.  Does  the  elasticity  of  the  monopolized  good  affect  the  monop- 

oly price  ? 

e.  Would  a  wheat  monopolist  and  a  diamond  monopolist  be 

governed  by  the  same  consideration? 
/.   In  what  three  ways  is  the  monopolist  restricted  in  his  price- 
making  ? 

3.  Suppose  a  manufacturer  of  talking  machines  should  absorb  his 
competitors. 

a.  What  would  be  the  effect  on  production? 

b.  How  would  prices  be  affected  ? 

c.  Would  new  competitors  be  likely  to  arise ?     Why? 


COMPETITION    VERSUS  MONOPOLY  153 

4.  "A  monopoly  is  often  advantageous  to  consumers,  for  prices  are 
less  than  they  would  be  under  competitive  conditions."  How  can  this 
be  true? 

5.  The  belief  generally  prevailed  a  few  years  ago  that  any  manu- 
facturing monopoly  was  sure  to  succeed. 

a.  Account  for  this  belief. 

b.  Has  experience  justified  this  belief  ?     Explain. 

c.  What  factors  were  overlooked  by  those  who  held  this  belief? 

d.  Howhas  the  attitude  of  society  toward  monopolies  changed? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  315-342. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  18^21L 

Fetter,  Economics,  Vol.  II,  pages  427-456. 

Seager,  Principles  of  Economics,  pages  198-228. 

Seligman,  Principles  of  Economics,  >5th  ed.,  pages  139-153,  337-350. 

Taussig,  Principles  of  Economics,  2d  ed..  Vol.  I,  pages  199-297. 


CHAPTER  XII      ' 
TRANSPORTATION 

35.  Stages  in  the  Development  of  Transportation  in 

THE  United  States 

Natural  waterways.  —  The  first  settlers  in  the  EngUsh  colonies 
came  by  way  of  the  sea,  and  here  they  found  a  land  blessed  with  a 
coast  admirably  adapted  to  navigation.  Also,  as  they  became 
acquainted  with  the  interior,  they  found  numerous  navigable 
streams  which  took  their  rise  in  the  Alleghenies  and  flowed 
gently  to  the  sea.  Some  were  so  broad  and  inviting  to  ocean- 
going ships  as  to  appear  more  like  arms  of  the  sea  than  rivers. 
The  Connecticut,  the  Hudson,  the  Delaware,  the  Potomac, 
the  James,  the  Savannah,  and  many  others,  each  drained  great 
stretches  of  fertile  land  or  penetrated  deep  into  the  fur  country. 
Very  soon,  as  we  might  expect,  numerous  settlements  were 
planted  along  their  banks,  and  then  they  became  important 
arteries  of  trade  and  travel. 

As  soon  as  the  settlers  had  pushed  across  the  mountains  west- 
ward they  found  themselves  again  favored  by  nature  ;  for  before 
them  lay  one  of  the  finest  river  systems  in  existence,  also  a 
chain  of  navigable  lakes  unsurpassed  in  the  whole  world.  Further 
south  a  great  number  of  short  streams  emptied  into  the  Gulf. 
Soon  the  Ohio  became  the  great  natural  highway  to  the  West, 
while  the  completion  of  the  Erie  Canal  in  1825  opened  the  lakes 
to  active  navigation.  Again,  as  in  the  colonial  days,  the 
settlers  depended  much  on  these  waterways ;  and  naturally  so, 

154 


TRANSPORTATION  155 

for  they  were  gifts  of  nature  waiting  to  be  utilized  by  the 
possessors  of  even  the  crudest  and  cheapest  craft. 

River  navigation  perhaps  played  a  relatively  less  important 
part  in  the  settlement  of  the  territory  west  of  the  Mississippi, 
yet  without  rivers  the  development  of  those  regions  would  have 
been  materially  retarded.  The  Red,  the  Arkansas,  the  Mis- 
souri, and  the  tributaries  of  the  upper  Mississippi  each  formed 
important  links  in  the  movement  to  the  Far  West.  Up  these 
streams  pushed  thousands  of  settlers  who  would  have  been 
unwilling  or  unable  to  undertake  the  journey  by  land. 

Wagon  roads.  —  As  settlement  spread  there  arose  a  demand 
for  wagon  roads,  which  the  colonial  governments  ordinarily  met 
by  compelling  each  householder  to  expend  a  certain  number  of 
days'  labor  yearly  on  the  public  highways.  Usually  these 
highways  were  little  more  than  widened  bridle  paths  or  Indian 
trails,  impassable  except  under  the  most  favorable  circum- 
stances. Later  the  frontier  states  provided  for  elaborate 
systems  of  wagon  roads,  many  of  which  never  got  beyond  the 
projection  stage.  Aside  from  a  few  roads  which  connected 
the  more  important  settlements,  early  state  enterprise  seems 
to  have  done  little  for  the  construction  of  permanent  wagon 
roads.  The  farthest  advances  in  this  direction  were  made  by 
state-incorporated  turnpike  companies.  These  companies  had 
a  direct  interest  in  encouraging  travel  over  the  wagon  roads 
which  they  controlled.  Consequently,  they  constructed  them 
with  considerable  care,  often  laying  down  stone,  logs,  or  sawed 
timbers,  and  kept  them  in  good  repair.  In  return  for  the 
expenses  thus  incurred,  the  companies  were  authorized  to  charge 
tolls.  Wagon  roads,  it  was  soon  seen,  were  too  intimately 
bound  up  with  the  welfare  of  society  to  permit  private  individuals 
or  corporations  to  fix  charges  and  lay  down  regulations  for  their 
use.  Consequently,  the  turnpike  companies  were  compelled 
one  after  another  to  relinquish  their  control  over  highways. 


156  ELEMENTARY   ECONOMICS 

/  Canals. — Simultaneously  with  the  building  of  turnpikes 
was  the  construction  of  artificial  waterways  known  as  canals. 
The  former  method  was  not,  as  some  writers  have  stated,  a 
forerunner  of  the  latter.  Nor  was  it  expected  that  these  two 
systems  of  transportation  should  compete,  since  canals  would 
necessarily  be  restricted  by  nature  to  a  few  localities.  It  would 
be  more  logical  and  closer  to  the  facts  to  say  that  during  the 
mania  for  canal-building  the  people  of  the  United  States 
regarded  them  merely  as  great  trunk  lines  of  commerce  and 
communication  toward  which  wagon  roads  of  every  description 
would  naturally  converge. 

The  first  great  success  in  canal-building  in  the  United  States 
was  the  Erie  Canal,  begun  in  1817  and  opened  to  navigation 
in  1825.  Spurred  on  by  a  desire  to  share  with  New  York  City 
the  prosperity  of  the  western  trade,  Philadelphia  and  Baltimore 
persuaded  their  respective  states  to  project  similar  enterprises. 
Soon  the  canal  craze  spread  westward.  Ohio  built  two, 
connecting  Lake  Erie  and  the  Ohio  River ;  Ohio  and  Indiana 
combined  to  join  Lake  Erie  to  the  Ohio  River  at  Evansville ; 
while  Illinois,  with  a  much  simpler  task  than  either  Ohio  or 
Indiana,  built  the  Illinois-Michigan  Canal,  connecting  the 
Illinois  River  and  Lake  Michigan.  It  is  safe  to  say  that  every 
one  of  these  canals  had  a  beneficial  influence  on  the  settlement 
of  the  Middle  West,  though  none  of  them  lived  up  to  the  expecta- 
tion of  its  more  optimistic  supporters.  They  failed,  not  neces- 
sarily because  they  were  poorly  constructed  or  poorly  located, 
but  only  after  the  railroad  had  demonstrated  its  superiority  as 
a  means  of  transportation. 

Railroads.  —  The  railroad  history  of  the  United  States  may 
be  said  to  have  begun  in  1830  with  the  opening  of  the  Baltimore 
and  Ohio  to  traffic.  After  many  experiments  in  respect  to 
roadbed,  rails,  engines,  and  cars,  both  on  this  line  and  on  other 
early  lines,  there  was  evolved  a  distinctively  American  railroad. 


TRANSPORTATION 


157 


^During  the  earlier  years  progress  was  slow.  In  1830  the  total 
number  of  miles  in  the  United  States  was  twenty-three.  In  1840 
the  number  was  almost  three  thousand.  From  that  time  on 
growth  was  more  rapid,  the  total  mileage  for  the  whole  country 
in  1860  being  in  excess  of  thirty  thousand.     During  the  Civil 

Railroad  Mileage  in  the  United  States  :  1830-1915. 
(In  thousands  of  miles.) 


1830 
1835 

1840 

1845 

1850 

1855 

1860 

1865 

1870 

1875' 

1880 

1885 

1890 

1895 

1900 

1905 

1910 
1916 

280 
260 
240 
200 
160 
120 
80 
40 

V 

y 

/ 

/ 

/ 

/ 

/ 

/ 

— 1 

^ 

/ 

y 

y 

^ 

^ 

160 


In  1830  THE  Total  Mileage  was  23 ;  in  1840  it  was  2818. 


War  neither  government  made  notable  headway  in  railroad 
construction.  The  return  of  peace,  however,  started  activities 
anew  with  the  result  that  a  mania  for  railroad-building  spread 
over  the  country,  particularly  in  the  West  and  Far  West. 
Soon  after  1880  the  total  mileage  passed  the  one  hundred  thou- 
sand mark,  the  average  annual  increase  exceeding  ten  thousand 
miles.    Later,  the  building  of  new  lines  gradually  gave  way  to 


158  ELEMENTARY   ECONOMICS 

the  extension  and  consolidation  of  old  ones,  until  at  the  present 
time  a  relatively  few  organizations  control  the  through  traffic  in 
the  United  States. 

Recent  tendencies.  —  Owing  to  a  number  of  disconnected 
causes  —  to  the  inability  of  the  railroads  to  handle  readily  all 
of  the  freight  offered,  to  improvements  in  automobiles,  and  to 
the  use  of  cement  for  road-building  —  more  attention  than 
ever  before  is  now  being  given  to  water  and  wagon-road  traffic. 
Thinking  people  are  becoming  convinced  that  the  United  States 
should  no  longer  neglect  the  natural  transportation  facilities 
furnished  by  the  Mississippi  River  and  its  tributaries.  To  that 
end  the  national  and  state  governments,  as  well  as  individuals 
and  corporations,  are  studying  how  these  rivers  may  be  used 
to  the  best  advantage.  The  states,  stimulated  by  the  desire  of 
owners  of  pleasure  cars  for  an  all-the-year-round  service,  are 
constructing  hard  roads.  Already  in  some  sections  automobile 
trucks  are  carrying  freight  between  neighboring  cities.  It  is 
not  too  much  to  expect  —  in  fact  it  has  already  been  proved 
practicable  —  that  the  future  will  see  the  automobile  an  active 
competitor  of  railroads  in  hauling  freight  as  well  as  passengers. 

36.   Railroad  Competition 

Railroads  operate  under  the  principle  of  diminishing  costs.  — 
Producing  under  conditions  of  decreasing  costs,  as  has  already 
been  explained,  simply  means  that  the  cost  per  unit  declines 
with  an  increase  in  the  number  of  units  produced.  Most 
manufacturers  and  retailers  as  well  as  a  great  many  business  men 
in  other  lines  produce  under  these  conditions,  but  none  of  them 
enjoy  its  benefits  more  than  do  railroads. 

It  is  a  fact  easily  observed  that  a  large  part  of  the  expenses  of 

a  railroad  goes  on  day  after  day  whether  one  train  or  a  half 

)  dozen  are  operated.     Its  roadbed,  depots,  terminals,  and  much 

of  its  equipment  must  be  maintained  whatever  the  volume  of 


TRANSPORTATION  159 

the  traffic  may  be.  Even  a  great  deal  of  the  expense  incurred 
in  the  payment  of  wages  is  fairly  constant.  Thus,  it  is  plain  that 
the  cost  of  handling  additional  traffic  is  in  no  wise  proportionate 
to  the  increase  in  the  traffic  itself.  Working  under  theso 
conditions,  railroad  managers,  as  long  as  they  were  permitted 
to  compete  freely  for  business,  were  tempted  to  give  large 
shippers  the  benefits  of  low  rates ;  but  in  doing  so  they  opened 
the  door  to  the  worst  abuses  with  which  the  railroad  business 
has  ever  been  cursed. 

Discriminations.  —  We  have  just  seen  how  discriminations 
originated.  We  may  now  properly  turn  to  a  study  of  their 
nature  and  character.  Briefly  stated  railroad  discriminations 
may  be  grouped  as  follows :  (1)  discriminations  among  prod- 
ucts, (2)  discriminations  among  localities,  and  (3)  discrimina- 
tions among  persons,  firms,  or  corporations.  Discriminations 
among  products  create  less  opposition  than  do  discriminations  in 
either  of  the  other  two  cases,  largely  because  they  have  not  been 
widespread,  and  hence  have  affected  few  people.  Xhe  best 
example  is  found  in  a  comparison  of  wheat  and  flour  rates  from 
the  upper  lake  region  to  the  Atlantic  seaboard.  Not  many 
years  ago  the  railroads  which  connected  those  two  sections  of 
the  country  charged  a  very  low  rate  on  east-bound  wheat  and  a 
correspondingly  high  rate  on  flour  in  the  same  direction.  The 
result  was,  so  Minnesota  millers  claimed,  that  exporters  pre- 
ferred to  have  their  wheat  ground  in  the  mills  along  the  coast. 

Discriminations  among  localities  have  been  more  serious  in 
that  they  have  affected  more  people,  and  have  created  in  the 
minds  of  the  public  a  suspicion  that  the  managers  practicing 
these  discriminations  have  profited  financially.  Discriminations 
of  this  character  have  usually  taken  form  in  favors  granted  one 
city  and  withheld  from  its  rivals.  Oftentimes  the  result  has 
been  prosperity  for  the  one  and  stagnation  for  the  others.  No 
doubt  if  all  the  reasons  for  making  this  kind  of  discrimination 


160  ELEMENTARY   ECONOMICS 

were  known  it  would  be  found  that  they  were  many  and  varied ; 
yet  the  chief  reason  has  usually  been  that  the  railroad  making 
the  discrimination  had  valuable  property  in  the  favored  city. 

The  most  repulsive  form  of  railroad  discrimination  is  among 
persons,  firms,  or  corporations ;  for  it  violates  all  the  rules  of 
fair  play  by  giving  one  competitor  an  unfair  advantage  over 
another.  The  worst  offender  in  this  respect  seems  to  have 
been  the  Standard  Oil  Company,  which,  with  its  enormous 
wealth  and  influence,  was  able  to  force  railroads  to  do  its  bidding. 
At  one  time  this  company  compelled  the  railroads,  not  only  to 
give  it  special  rates  on  refined  oil,  but  also  to  pay  into  its  treas- 
ury a  portion  of  the  freight  they  collected  from  competing 
refineries. 

It  would  be  misleading  to  close  this  discussion  without  call- 
ing attention  to  two  pertinent  facts.  First,  the  various  dis- 
criminations just  noticed  are  now  illegal  and,  let  it  be  hoped, 
little  practiced.  Second,  the  railroads  themselves  were  often 
unwilling  partners  in  the  discriminations,  though  it  must  be 
said  on  the  testimony  of  expert  railroad  administrators  that 
ordinarily  it  was  more  profitable  to  give  one  large  shipper  low 
rates  in  return  for  his  entire  business  than  to  exact  a  higher 
rate  from  a  number  of  smaller  shippers  who  were  at  any  moment 
likely  to  be  won  over  by  competing  lines. 

Nature  of  railroad  competition.  —  To  understand  the  nature 
of  railroad  competition  we  must  revert  to  an  earlier  section  in- 
this  chapter  in  which  the  principle  of  doing  business  under 
conditions  of  diminishing  costs  was  noted.  Since  the  unit  cost 
of  handling  additional  freight  or  passengers  is  very  small, 
competition  among  railroads,  when  it  exists  at  all,  is  likely  to 
be  very  bitter.  For  that  reason  it  is  known  as  "  cutthroat '' 
competition.  Not  many  years  ago  two  competing  lines  between 
Chicago  and  New  York  engaged  in  a  memorable  struggle  for  the 
traffic  between  those  two  points.     Ridiculously  low  rates  were 


TRANSPORTATION  161 

offered ;  so  low  were  they  in  fact  that  both  raih'oads  did  busi- 
ness at  a  loss,  thereby  endangering  their  solvency.  Finally  an 
arrangement  was  made  by  which  the  two  lines  pooled  their 
combined  business,  each  getting  a  certain  share  determined  in 
advance.  The  outcome  of  this  struggle  is  illustrative  of  the 
way  in  which  practically  all  railroad  wars  have  been  settled. 

37.   Rate-making 

The  principle  of  joint  costs.  —  Since  a  large  portion  of  a  rail- 
road's expense  goes  on  from  day  to  day  irrespective  of  the 
amount  of  its  traffic,  and  since  the  same  equipment  is  used  to 
haul  a  variety  of  products,  railroads  find  it  profitable  to  do  some 
of  their  business  at  a  loss.  Let  us  suppose  that  a  certain  line 
operates  nine  trains  a  day  at  a  total  cost  of  $4500,  or  $500  a 
train.  According  to  our  supposition,  this  cost  includes  every- 
thing —  operating  expenses,  interest  on  capital,  and  replace- 
ment fund.  Let  us  suppose  further  that  the  entire  additional 
cost  involved  in  adding  a  tenth  train  would  be  $300,  making  the 
total  cost  for  operating  the  ten  trains  $4800,  or  $480  a  train. 
Can  the  railroad  under  these  conditions  afford  to  operate  the 
tenth  train  ifit  earns  less  than  $480?  It  can.  Anything  above 
the  $300  extra  cost  involved  in  its  operation  would  be  clear 
earnings. 

Charging  all  that  the  traffic  will  bear.  —  Every  railroad 
manager  has  faced  such  a  problem,  and  we  may  now  concern 
ourselves  with  his  methods  of  solving  it.  Suppose  he  is  called 
on  to  fix  a  rate  for  some  product  which  his  road  has  never 
handled  before,  and,  to  connect  up  our  present  illustration  with 
the  preceding  one,  that  it  is  offered  in  quantities  sufficient  to 
demand  an  entire  train  daily,  which  we  will  call  the  tenth  train. 
Clearly,  our  manager  would  ordinarily  not  be  willing  to  make  the 
trainload  rate  lower  than  $300 ;  nor  would  he  dare  to  set  it  at 
a  figure  so  high  as  to  cause  the  shipper  to  abandon  the  project 


X 


162  ELEMENTARY   ECONOMICS 

of  shipping  his  goods.  Here,  then,  are  the  extremes  between 
which  the  manager  may  fix  his  rate ;  and  we  may  well  believe 
that  he  fixes  it  as  near  the  upper  limit  as  possible ;  that  is,  he 
charges  all  that  the  traffic  will  bear. 

f  Long  and  short  hauls.  —  To  a  great  majority  of  people  the 
/most  inconsistent  practice  of  railroads  is  to  charge  absolutely 
y\  /less  per  ton,  or  car,  or  train,  for  a  long  haul  than  for  a  short 
haul.  Their  reason  for  sO  doing  becomes  clear  when  one  takes 
into  account  the  principles  of  joint  costs,  and  of  all  that  the  traffic 
will  bear.  The  roads  themselves  properly  claim  that  the  rate 
which  they  set  for  the  short  haul  is  equitable ;  and  that,  while 
they  could  not  afford  to  build  and  equip  a  line  merely  to  make 
the  long  hauls  at  a  lower  rate,  they  can  and  do  make  them  at  a 
profit  simply  because  a  great  part  of  their  expense  must  be 
met  regardless  of  the  volume  of  the  traffic.  It  goes  without 
proof  that  they  would  prefer  the  long  haul  at  a  higher  rate ; 
which,  however,  competition  with  other  lines  and  with  water 
/^^navigation  compels  them  to  forego  in  order  to  get  the  business. 

^  38.   Government  Regulation  of  Railroads 

Attempts  of  the  states  to  regulate  railroads.  —  The  first 
serious  attempts  to  regulate  the  railroads  were  made  by  the 
various  states.  Nothing  was  more  natural,  for  many  of  the 
states  had  assisted  financially  in  the  building  of  railroads  and 
all  of  the  railroads  operated  under  state  charters.  The  chief 
thing  the  state  tried  to  do  was  to  regulate  freight  and  passenger 
rates.  The  railroads  on  their  part  very  generally  resisted 
regulation  :  by  testing  the  constitutionality  of  the  various  rail- 
road laws,  by  bringing  pressure  on  legislatures  to  repeal  ob- 
noxious laws,  and  by  politely  refusing  to  comply  with  the  laws. 
Such  actions  merely  hastened  the  day  of  effective  railroad 
legislation,  for  they  showed  as  nothing  else  could  that  the  rail- 
roads, if  allowed  to  carry  out  their  policies,  would  place  them- 


^ 


^ 


TRANSPORTATION  163 

selves  above  the  law  and  the  public.  Unfortunately,  many  of 
the  people,  like  the  railroads,  unwilling  to  allow  the  laws  to 
take  their  course  took  matters  in  their  own  hands.  They  even 
wertt  to  the  point  at  times  of  compelling  individual  train  crews 
to  collect  rates  and  operate  trains  contrary  to  instructions  from 
the  managers.  In  the  end  some  of  the  states  established  control 
over  the  lines  within  their  boundaries ;  but  the  control  was  only 
nominal,  since  they  had  no  authority  to  say  how  interstate  trade 
should  be  conducted,  that  being  a  power  expressly  delegated  to 
the  national  government  by  the  Constitution  of  the  United  States. 

The  Interstate  Commerce  Act.  —  Since  the  states  had  no 
control  over  interstate  commerce,  it  was  plainly  the  duty  of  the 
federal  government  to  enact  a  comprehensive  law  for  thes^ 
regulation  of  all  commerce  that  crossed  state  boundary  lines.  ^ 
Bills  were  introduced  and  discussed  in  both  houses  of  Congress. 
Wide  differences  of  opinion  appeared,  especially  as  to  the  best 
method  of  enforcing  the  regulation  embodied  in  the  proposed 
law.     The  final  result  was  the  Interstate  Commerce  Act  of  1887. 

Among  the  provisions  embodied  in  this  act,  six  deserve 
mention  at  this  point.  (1)  Discriminations,  such  as  we  have 
discussed  in  an  earlier  section  of  this  chapter,  were  prohibited, 
under  penalty  of  fine  and  imprisonment.  (2)  The  act  provided 
that  interstate  railroad  rates  should  be  just  and  reasonable. 
(3)  To  render  provisions  1  and  2  effective,  railroads  were  re-  . 
quired  to  make  their  rates  pubHc,  and  not  to  change  them  with- 
out due  notice.  (4)  Railroads  were  prohibited  from  charging 
more  for  a  short  than  for  a  long  haul  unless  authorized  to  do  so 
by  the  proper  authorities.  (5)  Pooling  was  declared  to  be  illegal. 
(6)  The  act  provided  also  for  an  Interstate  Commerce  Com- 
mission, appointed  by  the  president  of  the  United  States,  which 
should  direct  the  enforcement  of  the  law. 

During  the  earlier  years  of  the  act  the  commission  found  it 
difficult  to  enforce  the  law.     The  first  difficulty  lay  in  the  per- 


164  ELEMENTARY   ECONOMICS 

sonnel  of  the  commission  itself,  which,  while  it  contained  able 
men,  served  too  often  as  a  convenient  place  for  retired  members 
of  Congress  to  spend  their  declining  days.  Second,  the  law 
itself,  as  an  examination  of  its  provisions  shows,  was  largely 

A  Portion  of  the  Interstate  Commerce  Act. 

CHAP.  104.— An  act  to  regulate  coiiiincrce.  Feb.  4,  1887. 


Jie  it  oiactcfJ  hy  ilte  Senate  and  House  of  Representatives  of  the  United 
Stdtrs  of  America  in  Ccnf/rens  asacmbled,  Tliattbe  provisions  of  this  act     Interstate  cont 
.shall  apply  to  any  uomuioii  carrier  or  carriers  engaged  in  the  trauspor--  niercerc>;ulatiyus. 
tation  of  passengers  or  i>roperty  wholly  by  railroad,  or  partly  by  railroad     Appucatiou. 
and  i)artly  by  water  when  both  are  used,  under  a  common  control,  man- 
agementjor  arrangement,  for  a  continuous  carriage  or  shipment,  from 
one  State  or  Territory  of  the  United  States,  or  the  District  of  Colniu« 
bia,  to  any  other  ijtate  or  Territory  of  the  United  States,  or  the  District 
of  (Joluinbia,  or  from  any  place  in  the  United  States  to  an  adjacent  for- 
eign country,  or  from  any  jdace  in  the  United  States  through  a  foreigu 
country  to  any  other  place  in  the  United  States,  and  also  to  the  trans- 
l>ortation  in  like  manner  of  property  shipped  from  any  place  in  the  United 
States  to  a  foreign  country  and  carried  from  such  place  to  a  port  of  traus- 
shii>ment,  or  shipped  from  a  foreigu  couutry  to  any  place  in  the  United 
States  and  carried  to  such  place  from  a  port  of  entry  either  in  the 
United  States  or  an  adjacent  foreign  country:  Provided,  hotcever,  That     Proviso. 
the  provisions  of  this  act  shall  not  ai)ply  to  the  transportation  of  pas-     Kot    aiipli-aMo 
sengers  or  property,  or  to  the  receiving,  delivering,  storage,  or  hand-  *°.  *f"'''<^  wli«'lly 
ling  of  property,  wholly  within  one  State,  and  not  shipped  to  or  from  a  ^'*"'"  **"''  *'"  •  • 
foieign  country  from  or  to  any  State  or  Territory  as  aforesaid. 

The  term  "  railroad"  as  used  in  this  act  shall  include  all  bridges  and     "Railroatl." 
feriies  used  or  operated  in  connection  with  any  railroad,  and  aUo  all     "Tiansi>orta- 
the  road  in  nse  by  any  corporation  operating  a  railroad,  whether  owned  *  peiiiiition  of 
or  operated  under  a  contract,  agreement,  or  lease;  and  the  term  "  trans- 
liortation  "  shall  include  all  instrumentalities  of  shipment  or  carriage. 

All  charges  made  for  any  service  rendered  or  to  be  rendered  in  the     CbarKfs  ti*   »* 
transportation  of  passengers  or  property  as  aforesaid,  or  in  connectiou  rcasouabl.-. 
therewith,  or  for  the  receiving,  delivering,  storage,  or  handling  of  such 
property,  shall  be  reasonable  and  just ;  and  every  unjust  and  unreason- 
able charge  for  sneh  service  is  prohibited  and  declared  to  be  unlawful. 

Sec.  2.  That  if  any  common  carrier  subject  to  the  provisions  of  this  Special  wt.s  re- 
act shall,  directly  or  indirectly,  by  any  si)ecial  rate,  rebate,  drawback,  |'ntt»,ctc.,i'i..iii  >- 
or  other  device,  charge,  demand,  collect,  or  receive  froui  any  iMjrsou  or 

tier.'^ons  a  greater  or  less  compensation  for  any  service  rendered,  or  to 
je  rendered,  in  the  transportation  of  passengers  or  property,  subject  to 
lliu  4>rovisipns  of  this  act,  than  it  charges,  demands,  collects,  or  rec\,'ives 

negative  in  character ;  that  is,  it  stated  what  the  railroads  might 
not  do,  rather  than  what  they  should  do.  Finally,  since  the 
regulations  of  the  commission  were  subject  to  judicial  review, 
railroad  lawyers  made  special  efforts  to  have  its  decisions  re- 
versed in  the  United  States  Courts,  in  order  to  create  in  the 


TRANSPORTATION  165 

minds  of  the  people  the  feeUng  that -the  commission  was  weak 
and  inefficient. 

Amendments  to  the  law.  —  The  railroad  lawyers  did  in  fact 
create  the  impression  that  the  commission  was  weak,  also,  to 
their  own  grief,  that  the  law  needed  to  be  amended  so  as  to 
give  it  more  authority.  Accordingly,  in  1891  the  commission 
was  empowered  to  bring  suit  in  the  name  of  the  United  States 
against  offending  railroads.  Later,  the  Elkins  Amendment 
(1903)  and  the  Mann-Elkins  Amendment  (1910)  increased  the 
number  of  commissioners  and  changed  the  annual  salary  from 
$7500  to  $10,000 ;  gave  the  conmiission  control  over  the  book- 
keeping methods  of  the  roads;  prohibited  any  railroad  from 
transporting  products,  lumber  excepted,  in  which  it  is  interested 
as  a  producer ;  and  finally,  it  gave  the  commission  power  to  say 
just  what  rates  are  reasonable.  The  Elkins-Mann  Act  created 
a  commerce  court,  which  was  abolished  a  few  years  later,  to 
pass  on  appeals  from  the  conmiission  that  had  formerly  been 
carried  to  the  Supreme  Court  of  the  United  States. 

Meaning  of  government  regulation.  —  The  regulation  of 
railroads  by  the  government  has  a  deep  significance.  It  came 
only  after  the  pubhc  was  thoroughly  convinced  that  the  railroad 
business  was  necessarily  monopolistic  in  character,  and  that 
private  individuals  were  powerless  in  coping  with  the  problems 
of  transportation.  The  various  railroad  laws  show  that  the 
public,  while  slow  to  act,  can  be  aroused  when  its  vital  interests 
are  in  jeopardy.  What  it  did  in  the  case  of  railroads  it  can  do 
in  any  other  case ;  and  the  important  thing  for  us  to  remember 
is  that  the  interests  of  society  are  paramount,  and  must  be 
conserved  at  all  hazards. 

There  is,  however,  a  vital  difference  between  government 
regulation  and  government  ownership.  The  latter  is  far  more 
revolutionary  in  its  nature  and  involves  greater  administrative 
problems. 


l^ 


166  ELEMENTARY   ECONOMICS 

EXERCISES  AND   PROBLEMS 


1.  What-is  the  character  of  the  rivers  that  empty  into  the  Atlantic  ? 

2.  Mention  and  locate   the  most  important  harbors  along    the 
Atlantic  coast. 

3.  How  do  they  compare  with  the  Pacific  harbors  in  number  and 
size? 

4.  What  was  the  importance  of  rivers  in  settling  the  West  ? 

5.  What  effect  did  the  success  of  the  Erie  Canal  have  on  canal- 
building  in  the  West? 

6.  When  was  the  Baltimore  and  Ohio  Railroad  begun? 

7.  How  did  the  Civil  War  affect  railroad-building? 

8.  Which  Pacific  railroad  was  first  opened  to  trafi&c? 

9.  Why  did  the  national  government  assist  in  the  building  of 
transcontinental  railroads  ? 

10.  Why  should  our  rivers  be  utilized  to  a  better  advantage  ? 

11.  What  are  the  present  tendencies  in  wagon-road  building? 

12.  What  is  meant  by  the  expression  "joint  costs"? 

13.  Mention  the  various  kinds  of  railroad  discriminations. 

14.  How  can  a  railroad  often  charge  less  for  a  long  haul  than  for  a 
short  haul? 

15.  Why  are  railroad  rates  higher  on  shipments  east  than  on  ship- 
ments west? 

16.  On  what  ground,  if  any,  is  it  justifiable  for  railroads  to  charge 
what  the  traffic  will  bear? 

17.  What  are  "rebates"?  "pools"? 

18.  How  successful  have  the  states  been  in  regulating  railroads? 

19.  When  was  the  original  Interstate  Commerce  Act  passed  ? 

20.  What  changes  have  been  made  in  this  act? 

21.  Is  railroad  capital  fixed,  circulating,  specialized,  or  free? 

B 

1.   A  merchant  of  ladies'  ready-to-wear  garments  decides  to  put  in'a 
stock  of  shoes. 

o.  How  will  he   determine  his  overhead  expense  in  handling 

shoes? 
h.  Can  he  afford  to  sell  shoes  cheaper  than  an  exclusive  shoe 
merchant?     Why,  or  why  not? 


TRANSPORTATION  167 

c.  Can  he  afford  to  sell  shoes  at  a  loss  f     Why  ? 

d.  Can  he  make  gioney  by  doing  so  ?     How  ? 

2.  Suppose  you  invest  $2000  in  railroad  stock.  If  the  Interstate 
Commerce  Commission  reduces  rates  so  that  the  value  of  your  stock 
falls  to  $1500,  have  you  a  just  complaint?  Explain  with  some 
detail. 

3.  Make  a  list  of  the  public  service  corporations  in  your  community. 

a.  Which  have  corporative  forms  of  organization  ? 

b.  Which  are  monopolies  ? 

c.  Which  have  their  rates  for  service  fixed  by  law  ? 

d.  Which,  if  any,  do  not  earn  fair  dividends  ? 

4.  What  transportation  systems  have  been  beneficial  to  your 
community?  What  has  been  the  special  benefit?  Make  as  long  a 
list  as  you  can  of  the  ways  by  which  you  have  seen  goods  transported. 

5.  Illustrate,  from  your  own  experience  or  observation,  the  effect 
of  the  following  on  railroad  building : 

a.  Rivers. 

6.  Mountains. 

c.  Seaports. 

d.  Raw  materials. 

e.  Climatic  conditions. 


1.   "Many  of  the  routes  of  our  most  important  wagon  roads  were 
imarked  out  long  before  Europeans  came  to  our  shores." 

a.  What  factors  determined  the  location  of  paths  made  by  wild 

animals  ? 
h.  Why  would  the  Indians  naturally  frequent  these  paths  ? 

c.  What  roads 'did  the  earliest  settlers  use? 

d.  Why  should  they  widen  and  improve  the  paths? 
!.   A  political  speaker  once  declared  that  railroad  rates  should  be 

[the  same  for  all  commodities.     If  the  many  rates  now  in  effect  were 
■displaced  by  one  flat  rate : 

a.  How  would  prices  be  affected? 

h.  Make  a  list  of  goods  which  might  not  be  shipped. 

c.  How  would  railroad  rates  be  affected  ? 

d.  What  would  be  the  effect  on  railroads  in  different  sections  of 
the  country? 

e.  How  would  railroad  extension  be  affected  ? 


168  ELEMENTARY   ECONOMICS 

3.  "Improved  means  of  transportation  have  tended  not  only  to 
equalize  conditions  of  living  in  different  parts  of  the  world,  but  also  to 
better  the  living  conditions  of  the  lower  classes."  Do  you  agree? 
Why,  or  why  not? 

4.  The  Interstate  Commerce  Commission  was  authorized  a  few 
years  ago  by  Congress  to  undertake  a  valuation  of  the  railroads  of  the 
country. 

a.  Why  was  this  authorization  made? 

h.  What  different  kinds  of  valuation  was  it  possible  to  make? 

c.  Which  kind  would  the  railroads  themselves  prefer  ? 

d.  What  were  some  of  the  difficulties  encountered  by  the  Com- 


SUPPLEMENTARY    READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  343-372. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  557-576. 
Fetter,  Economics,  Vol.  II,  pages  408-426. 
Seager,  Principles  of  Economics,  pages  424—441. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  613-640. 
Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  II,  pages  368-381. 


CHAPTER  XIII 
MARKETING    THE   PRODUCTS    OF   INDUSTRY 

39.   Separation  of  Producers  and  Consumers 

Producing  for  the  market.  —  It  is  a  mere  truism  to  say  that 
production  leads  directly  to  the  market  —  that  is,  that  each 
producer  expects  not  to  consume  his  own  products,  but  to  sell 
them.  Aside  from  those  engaged  in  farming,  the  typical  Ameri- 
can workman  seldom  has  occasion  to  consume  the  products  of 
his  own  hands  or  brain.  If  he  works  in  a  shoe  factory  his  whole 
attention  is  absorbed  in  the  detailed  operation  he  is  called  on 
to  perform.  His  employer  could  not  possibly  pay  him  in  his 
own  products,  for  he  cannot  live  by  shoes  alone.  Producing 
ioT  the  market  thus  leads  to  striking  results.  It  permits  the 
individual  to  specialize,  and  to  create  utilities  which  he  himself 
has  no  desire  to  consume. 

So  accustomed  does  each  person  become  to  confine  his  pro- 
ductive activities  to  his  own  narrow  field  that  he  seldom  gives 
a  serious  thought  to  the  modifications  which  his  product  must 
'often  undergo  before  it  is  finally  ready  for  consumption.  A 
"lumberman  in  the  Far  Northwest  fells  trees  and  cuts  their 
trunks  into  convenient  lengths  for  rafting.  So  far  as  he  is 
concerned  the  logs  are  finished  product.  He  has  no  interest  ii^ 
the  tortuous  course  through  which  they  must  go  before  they 
can  be  consumed.  'His  is  the  log  market,  not  the  market  for 
I  house  lumber,  ship  timbers,  or  lead  pencils.  His  whole  atti- 
tude of  mind,  however,  would  be  changed  if  he  produced  for 
direct  consumption.     Then  he  would  see  logs,  not  as  logs,  but 

169 


170  ELEMENTARY   ECONOMICS 

as  houses,  bams,  sheds,  and  fences ;  that  is,  there  would  be  no 
such  thing  to  him  as  a  log  market.  Fortunately  for  the  prog- 
ress of  society,  the  productive  processes  are  usually  divorced 
from  consumption  in  so  far  as  identical  goods  are  concerned. 

Buying  for  consumption.  —  Producing  for  the  market  im- 
plies that  the  market  is  the  source  of  want  gratification.  Our 
shoe-factory  worker  goes  into  the  market  and  there  he  supplies 
his  wants  by  exchanging,  not  shoes,  but  the  wages  which  he  has 
previously  received  in  the  form  of  money.  This  too  is  such  a 
common  everyday  occurrence  as  seldom  ever  to  attract  atten- 
tion. Yet  its  significance  is  apparent  when  we  give  it  a  second 
thought.  Every  one  of  us  daily  consumes  a  variety  of  goods 
the  origins  of  which  are  remotely  removed  from  us.  A  common 
lead  pencil  carries  the  stamp  of  far  distant  forests  and  mines,  of 
complicated  and  costly  machinery,  of  countless  miles  of  rail 
and  wa^er  transportation,  and  of  infinite  labor  and  toil. 

40.   Indirect  Methods  of  Marketing 

The  primitive  market  place.  —  The  first  bartering,  as  we 
have  already  noticed,  was  characterized  by  the  higgling  of  two 
individuals  alone,  uninfluenced  by  other  traders.  The  next 
step  was  the  primitive  market  place,  which  owed  its  origin  to 
the  accessibility  of  its  location  to  various  tribes ;  or  perhaps  to 
the  influence  of  some  neighboring  church  or  monastery  which 
undertook  to  keep  peace  among  the  traders.  Here  at  stated 
periods  the  people  assembled,  bringing  with  them  the  products 
which  they  desired  to  exchange  for  other  goods.  Very  soon,  we 
may  imagine,  it  was  discovered  that  certain  goods,  such  as 
iron,  spices,  salt,  and  woolen  cloth,  were  very  generally  in 
demand.  Naturally,  some  more  alert  than  their  neighbors 
saw  the  advantage  of  devoting  more  time  to  the  production  of 
those  goods  which  were  generally  desired.  They  saw  also  that 
they  could  supply  their  own  wants  for  other  goods  easier  by 


MARKETING   THE   PRODUCTS   OF   INDUSTRY      171 

resorting  to  the  market  place  than  by  direct  production.  At 
the  same  time  another  group  known  as  "merchants  saw  the 
advantage  of  giving  their  whole  time  to  the  collection  of  goods 
for  these  markets.     Gradually  there  grew  up  the  custom  of 


Maxwell  Street,  Chicago. 
Here  business  is  conducted  on  the  street,  very  much  as  it  is  in  an  ordinary- 
retail  store. 


using  money  in  making  exchanges,  the  merchants  buying  goods 
from  producers  and  seUing  them  again  to  consumers.  From 
such  crude  beginnings  has  developed  the  highly  complicated 
industrial  life  of  the  present  time  with  its  producing  to  sell 
and  its  buying  to  consume. 


172  ELEMENTARY   ECONOMICS 

The  place  of  the  retailer.  —  Clearly,  the  most  important  link 
in  the  chain  which' binds  production  and  consumption  is  the 
retailer,  for  it  is  he  that  must  anticipate  the  wants  of  the  con- 
sumer, provide  beforehand  for  supplying  these  wants,  and  have 
the  goods  ready  in  convenient  form  for  the  consumer  when  they 
are  demanded.  His  position  is  also  the  least  open  to  attack 
by  those  who  insist  that  the  producer  and  the  consumer  are  too 
far  apart.  His  would  be  the  last  to  give  way.  The  normal 
American  family  buys  its  groceries  in  small  amounts  —  a  pound 
of  coffee,  five  pounds  of  sugar,  a  quarter  of  a  barrel  of  flour, 
and  so  on.  It  has  not  sufficient  funds  to  permit  buying  in  any 
other  way,  if  it  were  so  inclined.  Besides,  it  is  not  inclined, 
for  too  much  trouble  is  involved  in  finding  producers.  Even 
that  would  not  be  the  end  of  the  matter.  Some  one  must  divide 
and  subdivide  the  product,  wrap  it  carefully,  and  deliver  it  to 
the  door  of  the  consumer.  All  these  things  the  retailer  does. 
Besides,  he  usually  furnishes  limited  credit,  gives  his  advice 
freely  in  making  selections,  and  stands  behind  the  quality  of 
his  goods. 

During  the  early  months  of  the  Great  War  many  consumers 
were  persuaded  that  they  could  effect  economies  by  going  more 
directly  to  the  producers.  Consequently,  they  demanded  that 
wholesalers  in  meats,  fruits,  vegetables,  and  bread  should  meet 
them  halfway  by  establishing  conveniently  located  markets. 
This  demand  the  wholesalers  very  generally  met.  In  one  West- 
ern city  it  soon  became  a  practice,  if  not  a  fad,  for  well-to-do 
people  to  trade  at  these  markets  and  to  carry  their  purchases 
home.  The  spirit  which  prompted  this  movement  was  laudable 
to  say  the  least.  It  taught  the  typical  housewife  more  about 
relative  food  values  than  she  had  ever  before  known.  Besides 
it  gave  her  a  new  view  of  life  and  a  keener  sympathy  with  her 
less  fortunate  neighbors.  The  movement,  however,  did  not 
result  in  the  elimination  of  retailing  costs,  though  it  evidently 


MARKETING   THE   PRODUCTS   OF   INDUSTRY      173 

reduced  them  for  a  time.  The  wholesalers  found  that  con- 
siderable cost  in  the  way  of  rent,  clerk  hire,  depreciation, 
and  dishonesty,  was  involved.  Also  the  consumer  found 
that  the  economies  effected  did  not  in  many  cases  compen- 
sate for  the  loss  of  real  service  on  the  part  of  the  established 
retailer. 

Place  of  the  middleman.  —  The  economic  justification  of  the 
middleman  —  jobber,  commission  merchant,  broker  —  is  less 
evident,  though  even  he  renders  a  service  which  the  business 
world  would  find  it  inconvenient,  if  not  impossible,  to  abolish. 
,His  chief  function,  as  marketing  is  now  organized,  is  to  serve, 
Us  it  were,  as  the  agent  of  retailers ;  to  collect  for  them  and  have 
ready  on  call  supplies  of  goods  from  which  they  can  replenish 
their  stocks;  to  assist  them  in  anticipating  demand;  and 
finally,  to  extend  credit  to  the  retailers,  to  give  them  the  benefit 
of  his  experience  and  judgment,  and  to  secure  them  against  loss 
resulting  from  inferior  goods. 

The  middleman,  unlike  the  retailer,  who  comes  in  contact 
with  the  consumer,  renders  his  greatest  marketing  service  to-the 
producer.  A  wholesale  grocer,  for  example,  deals  more  or  less 
directly  with  meat-packers,  canners,  millers,  and  importers. 
He  furnishes  them  a  market  which  he  has  already  made,  or 
undertakes  to  make,  among  retailers,  thereby  relieving  them 
of  heavy  selling  expense.  Moreover,  his  advance  purchases, 
by  rendering  it  easier  to  make  production  conform  to  consump- 
tion, tend  to  stabilize  industry.  The  commission  merchant, 
particularly  if  he  deals  in  agricultural  products,  occupies  an 
important  placa  in  marketing,  which  farmers,  despite  their 
contention  to  the  contrary,  would  find  it  difficult  to  fill  by  deal- 
ing directly  with  packers  or  retailers. 

Basis  of  indirect  marketing.  —  It  must  be  clear  by  this  time 
that  there  is  some  good  reason  why  producers  and  consumers  do 
not  ordinarily  deal  directly  with  each  other.     It  must  also  be 


174  ELEMENTARY   ECONOMICS 

equally  clear  that  no  middleman  or  group  of  middlemen  can 
forge,  uninvited,  additional  links  in  the  marketing  chain.  Conse- 
quently, there  must  be  some  economic  reason  for  their  existence 
as  such.  We  can  best  find  this  reason  by  reference  to  some 
simple,  everyday  practices  familiar  to  us  all.  The  typical 
American  farmer  knows  that  in  the  neighboring  town  there  is  a 
market  for  his  weekly  supply  of  eggs.  The  people  of  the  town 
know  also  that  every  farmer  in  the  surrounding  country  has  a 
surplus  of  eggs.  With  these  facts  established,  it  is  obvious  that 
our  farmer  could,  if  he  desired,  dispose  of  every  one  of  his  eggs 
in  the  town  by  peddling  them  from  house  to  house ;  also  that 
any  housewife  in  the  town  could,  if  she  desired,  secure  her 
weekly  supply  of  eggs  by  calling  at  some  farmer's  home.  The 
farmer  ordinarily  does  not  care  to  undertake  the  sale  of  his 
surplus  eggs  among  the  consumers  in  the  town.  The  town 
housewife,  on  her  part,  has,  let  us  say,  no  ready  means  for  going 
into  the  country.  In  either  case  time  and  expense  are  involved 
in  effecting  a  sale.  Neither  is  willing  to  take  the  initiative. 
Both  resort  to  the  local  grocer,  who  can,  and  usually  does, 
handle  the  eggs  cheaper  and  with  greater  satisfaction  to  both 
consumer  and  producer  than  either  the  farmer  or  the  housewife 
could  have  handled  them.  The  retailer  can  also  render  cheap 
and  efficient  service  in  the  matter  of  delivery,  if  he  is  not  too 
much  incumbered  by  those  who  abuse  it.  The  only  proof  for 
this  statement  is  that  independent  delivery  systems  operating 
in  many  moderately  sized  cities  usually  charge  no  more  than  five 
cents  for  delivering  an  order  of  any  amount.  Delivery  of  a  loaf 
of  bread  or  of  a  spool  of  thread  under  these  circumstances 
imposes  a  burden  on  the  consumer ;  and  it  should,  for  they  are 
the  very  consumers  that  have  rendered  delivery  systems  costly. 
As  it  is  with  retailers  so  it  is  with  middlemen.  They  have 
arisen  to  fill  gaps  between  producers  and  consumers  which 
neither  could  or  would  fill. 


\ 


MARKETING   THE   PRODUCTS   OF   INDUSTRY      175 

Wastes  in  indirect  marketing.  —  The  mere  fact  that  certain 
groups  of  retailers  and  middlemen  meet  demands  made  by 
producers  and  consumers  is  not  evidence  in  itself  that  there 
are  no  sources  of  waste  in  our  present  system  of  marketing. 
One,  the  delivery  system,  has  already  been  mentioned.  An- 
other is  poorly  written  and  poorly  prepared  advertising  copy. 
A  third  is  in  the  failure  to  make  distinctions  between  con- 
sumers. A  city  department  store,  let  us  say,  maintains  a  free 
rest-room,  a  free  nursery,  and  provides  telephone  service  with- 
out cost,  the  entire  expense  being  paid  in  the  long  run  by  its 
customers.  Those  who  come  in  often  to  rest,  or  to  leave  their 
babies  while  they  shop,  and  those  who  use  the  free  telephone 
service  regularly,  can  well  afford  to  pay  higher  prices  for  goods 
than  would  be  the  case  under  more  modest  surroundings.  But 
how  about  those  customers  who  are  never  tired,  have  no  chil- 
dren, or  are  dumb  ?  Why  should  they  be  compelled  to  pay  for 
something  they  cannot  use?  The  usual  answer  is  that  this 
store,  because  of  its  large  volume  of  sales,  sells  as  cheaply  as  its 
smaller  competitors.  There  is  truth  in  the  answer,  which, 
however,  does  not  explain  why  customers  should  be  charged  for 
services  they  cannot  enjoy. 

Another  waste  in  the  present  system  of  marketing,  but  which 
in  itself  is  not  inherent  therein,  comes  from  selling  goods  on 
credit.  Any  merchant,  whether  he  be  retailer  or  jobber,  knows 
from  experience  or  observation  that  a  credit  business  always 
involves  bad  accounts,  and  that  its  maintenance  in  the  mere 
matter  of  bookkeeping  incurs  considerable  expense.  Clearly, 
•cash  customers  must,  if  the  seller  is  not  to  lose,  bear  the  burden 
of  bad  accounts.  Here  as  in  many  other  cases  of  waste  the 
consumer  is  largely  responsible.  If  every  cash  customer  should 
confine  his  purchases  to  cash  stores,  the  practice  of  granting 
credit  would  cease  in  a  short  time.  What  has  been  said  in  this 
respect  is  merely  illustrative.     Any  one  of  us  can,  by  observing, 


176  ELEMENTARY   ECONOMICS 

discover  a  surprisingly  large  number  of  other  sources  of  waste 
in  marketing. 

41.  More  Direct  Methods  of  Marketing 

Nature  of  the  problem.  —  The  need  for  eliminating  every  un- 
necessary expense  involved  in  getting  goods  into  the  hands  of 
the  consumer  is  real ;  and  no  proposal  that  offers  to  meet  this 
need  should  be  neglected,  even  though  its  adoption  might  work 
hardships  on  particular  groups  of  individuals.  Society  is 
entitled  to  every  saving  possible  in  this  respect.  No  individual 
or  group  of  individuals  can  rightfully  impose  its  smaller  interest 
as  an  obstacle  to  the  progress  of  social  welfare.  Consequently, 
the  contention  that  some  change  in  marketing  methods  is  un- 
desirable simply  on  the  ground  that  it  destroys  the  business 
of  some  class  of  merchants,  is  baseless.  In  fact,  it  is  worse 
than  baseless ;  it  is  harmful,  for  it  assumes  that  society  should 
continue  to  reward  the  economic  activities  of  a  man  after  his 
services  to  society  have  ceased. .  Apart  from  such  contentions 
and  the  arguments  that  go  with  them,  we  can  conclude  that 
any  change  in  marketing  methods  carried  on  under  conditions 
of  competition  is  likely  to  be  beneficial,  since  it  could  occur 
only  as  the  result  of  a  natural  demand. 

The  department  store.  —  The  department  store  claims  to 
effect  economies  in  marketing:  (1)  by  eliminating  jobbers, 
brokers,  and  even  importers,  and  (2)  by  saving,  through  com- 
bination and  organization,  much  of  the  expenses  of  retaihng 
incurred  by  small  stores.  Whether  or  not  it  succeeds  in  either 
of  these  two  respects  is  a  disputed  question,  since  its  gains 
from  buying  direct  and  in  large  quantities  and  from  its 
economies  in  organization  are  offset,  at  least  to  some  degree, 
by  its  heavy  advertising  and  overhead  expenses.  It  is  probable 
that  the  advantage  which  these  stores  offer  to  the  consumer  is 
one  of  selection  rather  than  one  of  price.    Obviously,  in  a  great 


MARKETING   THE   PRODUCTS   OF   INDUSTRY      177 

many  lines  a  modem  department  store  has  a  wider  variety  than 
any  of  its  smaller  competitors.  There  is  not,  however,  such  a 
wide  difference  as  many  people  suspect,  especially  between  the 


Courtesy  of  John  Wanamaker,  Philadelphia 

Interior  View  of  a  Large  Department  Stobe. 


department  stores,  on  the  one  hand,  and  well-managed  specialty 
stores,  on  the  other. 

The  mail-order  house.  —  The  mail-order  house  goes  even 
beyond  the  department  store  in  an  effort  to  bring  producer  and 
consumer  closer  together.  Working  from  the  production  side, 
the  typical  mail-order  house  is  a  manufacturer  as  well  as  a 
large-scale  buyer  of  goods  directly  from  producers.  It  may 
own  sawmills,  lumber  yards,  furniture  factories,  shoe  factories, 
stove  factories,  and  various  other  mills  and  factories.  Or,  as 
is  often  the  case,  it  may  contract  for  the  entire  output  of  factories 
and  mills  owned  and  operated  by  other  concerns.     Whatever 


178  ELEMENTARY    ECONOMICS 

the  method  employed,  its  purpose  in  any  case  is  to  secure  goods 
at  the  lowest  possible  price.  Much  more  significant  are  the 
methods  employed  by  mail-order  houses  to  get  their  goods  into 
the  hands  of  consumers.  Invariably,  the  medium  of  salesman- 
ship is  a  printed  catalog,  characterized  by  its  excellence  of 
advertising  copy  and  illustrations.  Customers  order  direct 
from  the  catalog,  each  advertised  article  bearing  a  stock 
number  and  price.  ' 

No  other  business  institution  in  the  country  is  so  universally 
disliked  by  retailers,  who  argue  that  a  mail-order  house,  quality 
as  well  as  price  considered,  does  not  give  better  values  than 
local  dealers.  They  also  take  the  position  that  it  is  the  duty 
of  consumers  to  keep  their  money  at  home  by  patronizing  them. 
The  validity  of  the  first  argument  rests  on  a  question  of  facts  ; 
of  the  second,  on  economic  principle.  Whether  or  not  a  certain 
mail-order  house  offers  better  values  than  a  certain  group  of 
retailers  is  a  question  that  can  only  be  answered,  if  at  all,  after 
an  exhaustive  examination  by  experts.  The  appeal  to  local 
pride  has  usually  had  little  weight,  since  consumers  are  likely  to 
feel  justified  in  getting  the  best  bargains  possible.  Retailers 
everywhere  are  beginning  to  see  the  futility  of  the  "home- 
market  "  argument,  with  the  result  that  more  and  more  they  are 
taking  the  initiative  in  persuading  people  to  compare  values, 
and  in  some  cases  the  retailers  are  profiting  by  studying  the 
advertising  copy  in  the  "big  catalogs."  Moreover,  they  are 
awakening  to  the  possibilities  which  come  from  a  more  liberal 
policy  of  advertising  in  their  local  newspapers. 

The  chain  store  and  the  variety  store.  —  The  typical  chain 
store  resembles  the  department  store  in  that  it  attempts  to 
eliminate  the  middleman.  Unlike  the  department  store,  how- 
ever, it  deals  in  one  general  line,  and  has  many  different  sites. 
The  greatest  advances  in  this  respect  have  been  in  such  lines  as 
restaurants  and  drug  stores.     The  large  variety-store  system 


{ 


MARKETING   THE    PRODUCTS   OF   INDUSTRY      179 

also  buys  direct  from  manufacturers  and  retails  thi:Dugh  its 
stores  directly  to  the  consumer.  Its  success  has  rested  on  the 
fact  that  regular  stores  have  never  given  sufficient  attention 
to  what  they  are  likely  to  consider  ''  triffing  trade."  This 
trade  for  any  one  store,  such  as  a  hardware  store  or  a  plumbing 
shop,  is  in  fact  of  slight  importance.  Yet  when  gathered  to- 
gether it  mounts  into  millions  of  dollars  annually. 

Direct  sale  to  the  consumer.  —  It  will  be  noticed  that  in  the 
preceding  discussions  the  attempts  to  lessen  the  distance  between 
the  producer  and  the  consumer  have  been  made  by  neither  pro- 
ducers nor  consumers  as  such,  but  by  third  parties.  We  may 
now  turn  our  attention  to  another  aspect  in  which  the  producer 
tries  to  bring  his  product  directly  to  the  consumer.  The  most 
easily  observed  example  of  this  is  the  sale  of  gasoline  by  th^ 
Standard  Oil  Company.  Everywhere  one  sees  the  stations  of 
this  concern  serving  the  automobile  public,  though  it  must  be 
kept  in  mind  that  the  same  product  may  be  obtained  from  local 
dealers.  Other  producers,  too,  sell  only  direct  to  consumers, 
depending  on  personal  letters,  catalogs,  and  national  advertising 
to  create  a  demand  for  their  goods. 

EXERCISES  AND   PROBLEMS 


1.  What  is  the  significapce  of  producing  for  the  market? 

2.  When  is  a  product  finished  ? 

3.  How  did  markets  arise  ? 

4.  What  determined  their  location  ? 

5.  What  kinds  erf  goods  were  first  produced  for  the  market  ? 

6.  Just  how  important  is  the  place  of  the  retailer  in  marketing  ? 

7.  What  did  the  Great  War  teach  about  marketing? 

8.  What  is  the  difference  between  a  retailer  and  a  middleman? 

9.  Why  are  there  so  many  different  kinds  of  middlemen  in  market- 
ing? 

10.    Of  what  value  is  the  wholesaler  or  commission  merchant  ? 


180  ELEMENTARY   ECONOMICS 

11.  What  are  some  of  the  wastes  in  indirect  marketing? 

12.  How  far  would  direct  marketing  eliminate  these  wastes? 

13.  Why  do  department  stores  maintain  free  rest-rooms  ? 

14.  Who  pays  the  expense  of  maintaining  them  ? 

15.  How  does  credit  lead  to  waste,  particularly  in  retailing  ? 

16.  What  groups  of  individuals  might  object  to  more  direct  methods 
of  marketing  ? 

17.  How  valid  are  the  claims  of  department  stores  that  they  sell 
goods  cheaper  than  their  competitors  in  special  lines  ? 

18.  What  effect  has  variety  of  stock  on  volume  of  trade  ? 

19.  What  is   the    chief    objection    urged    against    the    mail-order 
house  ? 

20.  How  valid  is  this  objection  ? 

21.  What  is  a  "chain  store"? 

22.  Why  can  a  variety  store  usually  offer  goods  at  excessively  low 
prices  ? 

23.  What  lines  of  goods  are  best  adapted  to  sell  directly  to  consumers  ? 

B 

'  1.  Trace  a  quantity  of  iron  ore  through,  its  different  processes  of 
production,  pointing  out  the  different  markets  in  which  it  is  offered 
for  sale.     Do  the  same  with  corn,  wheat,  and  cotton. 

2.  Mention  any  articles  of  your  own  production  which  you  have 
consumed. 

3.  Imagine  yourself  in  an  early  English  market  place. 
a.  Where  was  it  located? 

h.  What  kinds  of  goods  were  offered  for  exchange  ? 

c.  What  difficulties  were  encountered  in  making  exchanges? 

d.  Was  bargaining  characterized  by  "higgling"?     Explain. 

e.  How  important  was  the  part  played  by  money  ? 

4.  Suppose  you  decide  to  follow  the  "cash  and  carry"  plan  of 
buying  groceries  and  meats. 

a.  How  much  time  would  you  consume  each  day  in  going  to  the 

markets  ? 
h.  Would  these  trips  involve  wear  and  tear  on  shoes  and  clothing  ? 

c.  Can  goods  be  carried  more  cheaply  than  they  can  be  hauled  ?^ 

d.  Is  your  time  worth  more  or  less  than  that  of  a  delivery  boy? 

e.  Would  you  be  more  likely  to  buy  with  greater  care  than  if  you 

telephoned  your  orders  ? 


I 


MARKETING   THE    PRODUCTS    OF   INDUSTRY      181 

/.   Weigh  the    advantages  and  disadvantages  of  marketing  in 
person. 
i.  Which  has  the  greater  weight  ? 
ii.  Is  the  weight  as  great  as  is  sometimes  thought? 

5.  Give  some  instances  from  your  own  experience  or  observation, 
of  attempts  to  bring  producers  and  consumers  closer  together. 

o.  How  well  did  these  attempts  succeed? 

b.  Did  any  one  oppose  them?     Who?     Why? 

6,  A  merchant  requests  you  to  draw  up  plans  for  the  establishment 
of  a  chain  of  stores. 

a.  What  kind  of  business  would  you  suggest?     Why? 

b.  In  what  cities  would  you  establish  stores  ? 

c.  What  sort  of  sites  would  you  desire  to  utilize? 

d.  How  would  the  choice  of  cities  and  sites  be  influenced  by  the 

character  of  the  business? 


1.  "The  greatest  need  in  the  modern  industrial  world  is  to  bring 
the  producer  and  the  consumer  together." 

a.  Is  this  a  universal  opinion?     Why,  or  why  not? 
6.  Who  would  be  likely  to  hold  an  opposite  opinion? 

c.  What  steps  would  be  necessary  in  making  such  a  change? 

d.  Who  would  profit  most? 

e.  Who  would  suffer  ? 

2.  During  the  past  decade  two  or  three  men  have  made  millions  of 
dollars  in  operating  chains  of  restaurants. 

a.  What  particular  advantage  has  the  chain  store  in  the  res- 
taurant business? 
6.  Which  types  of  restaurants  still  predominate  in  the  cities  ? 

c.  What  is  the  present  tendency  ? 

d.  How  does  a  rise  in  the  prices  of  foodstuffs  affect  the  different 

types  of  restaurants  ? 

3.  The  chief  argument  advanced  by  retailers  against  mail-order 
houses  is  that  the  people  would  profit  by  spending  their  money  at 
home. 

a.  Do  mail-order  houses  undersell  local  merchants  ?     Discuss. 

b.  Just  how  far  is  this  argument  valid? 

c.  To  what  extent  is  advertising  a  factor  in  the  success  of  the 

mail-order  house? 


182  ELEMENTARY   ECONOMICS 

d.  Can  local  merchants  use  to  advantage  the  methods  employed 

by  mail-order  houses?     How? 

e.  How  may  local  newspapers  be  used  to  advantage  by  local 

merchants  in  their  competition  with  mail-order  houses? 
4.    Discuss  with  a  live  local  merchant  the  economies  claimed  by 
mail-order  houses.     Ask  him  to  compare  prices  and  quality.     Which 
offers  the  best  value  ? 

SUPPLEMENTARY   READING 
Ely,  Outlines  of  Economics ^  3d  ed.,  page  154. 


CHAPTER  XIV 
GOVERNMENT   AND    PRODUCTION 

42.  Patents,  Copyrights,  and  Trade-marks 

Hope  of  reward  a  factor  in  improvement.  —  The  hope  of 
financial  reward  stimulates  enterprisers,  as  we  have  seen,  to 
exert  themselves  industrially.  The  same  hope  stimulates 
inventions  and  literary  productions,  though  the  opinion  pre- 
vails among  many  people  that  inventors  and  authors  work 
merely  for  the  love  of  the  work  itself.  'Occasionally  some 
individual  gives  his  whole  life  unselfishly  to  the  production  of  a 
machine,  or  to  the  discovery  of  a  chemical  process,  or  to  the 
writing  of  a  book.  The  overwhelming  majority  of  men,  how- 
ever, whether  they  be  enterprisers,  laborers,  scientists,  or 
authors,  are  encouraged,  if  not  inspired,  to  toil  long  hours 
and  to  undergo  mental  and  physical  discomfort  by  the  hope  that 
their  labors  will  bring  them  financial  reward.  And  it  is  for- 
tunate for  the  progress  of  the  industrial  arts  that  men  are 
willing  to  think  and  to  work,  even  though  they  are  prompted 
wholly  or  in  part  by  selfish  motives.  Realizing  that  a  hope  of 
financial  reward  serves  to  encourage  inventive  genius,  the  United 
States  in  common  with  all  other  civilized  nations  permits 
inventors  and  authors  to  enjoy  a  monopoly  of  their  products. 
Practices  vary  from  country  to  country,  though  the  principle 
involved  is  the  same  in  all  cases. 

Patent  law  of  the  United  States.  —  The  law  under  which 
patents  are  now  issued  in  this  country  states  that  "  any  person, 
native  or  foreign,  who  has  invented  or  discovered  any  new  and 

183 


184 


ELEMENTARY   ECONOMICS 


useful  art,  machine,  manufacture  or  composition  of  matter,  or 
any  new  and  useful  improvement  thereof,  not  known  or  used  in 


Number 

OP 

Patents  Issued 

BY  Years: 

1895-1917. 

10(0   Ts-OOOO    —    <Mt0'*loa>NC00>O'-CV<0xtt0<Dr»- 

• 

46,000 

/ 

^ 

/ 

\ 

/ 

\ 

1 

40,000 

/ 

/ 

• 

/ 

1 

V 

/ 

/ 

\ 

1 

\ 

35,000 

V 

/ 

\ 

1 

\ 

/ 

\ 

1 

\ 

' 

1 

Panic  of  1907 

1 

1 

s, 

/ 

30.000 

\ 

1 

^ 

/ 

1 

1 

_/ 

/ 

^ 

65.000 

/ 

/ 

> 

^ 

Sv 

/ 

/ 

\ 

1 

Period  of  Business  Expansion 
1898-1907 

L 

_J 

1     1    1    1    1    1    1    1    1 

45,000 


40.000 


35,000 


30,000 


25,000 


this  country,  and  not  patented  or  described  in  any  publication  in 
this  or  any  foreign  country,  before  his  inveutioa  or  discovery 


GOVERNMENT  AND  PRODUCTION  185 

thereof,  and  not  in  public  use  or  on  sale  for  more  than  two  years 
prior  to  his  application,  unless  the  same  is  proved  to  have  been 
abandoned,  may  upon  payment  of  the  fees  required  by  law  and 
other  due  proceedings  had,  obtain  a  patent  therefor."  The  law 
further  states  that  the  inventor  may  have  for  a  period  of  seven- 
teen years  the  exclusive  right  to  manufacture  and  sell  his 
invention.  Infringement  of  a  patent  gives  the  inventor  just 
cause  for  appealing  to  the  courts  for  protection  and  redress. 

Copyright  law.  —  In  principle  a  copyright  resembles  a  patent. 
Each  is  the  basis  of  a  temporary  monopoly.  The  most  common 
copyrighted  productions  are  books.  Songs,  pictures,  magazines, 
and  even  news  items  may  also  be  copyrighted.  As  in  the  case 
of  patents,  infringement  is  punishable  by  law.  A  copyright 
nms  for  twenty-eight  years,  though  the  author  or  his  direct 
heirs  may  get  an  extension  of  fourteen  years.  No  large  per 
cent  of  copyrights  is  ever  extended,  however,  for  the  sale  of  a 
book  is  likely  to  cease  within  a  few  years  after  it  is  first  issued. 
Books  written  in  foreign  countries  may  now  be  copyrighted  in 
the  United  States,  though  for  years  this  privilege  was  refused ;' 
and  this  refusal  accounts  in  large  measure  for  the  hostility  of 
Charles  Dickens  and  other  English  writers  toward  America. 

Trade-marks.  —  In  registering  a  trade-mark  the  government 
grants  to  the  owner  its  exclusive  use  in  marking  certain  commod- 
ities. Whether  or  not  it  will  ever  possess  any  value  depends 
entirely  on  the  owner's  ability  to  create  for  it  good  will  in  the 
[.  minds  of  the  buying  public.  If  he  succeeds,  it  becomes  the 
basis  of  a  profitable  business.  The  monopolistic  character  of 
the  trade-mark  accounts  in  large  measure  for  one  of  the  most 
important  tendencies  in  present-day  marketing  —  the  increase 
in  the  number  of  nationally  advertised  products.  Without  its 
protection  producers  could  not  afford  to  create  a  demand  for 
particular  brands,  for  they  would  have  no  assurance  that  un- 
scrupulous competitors  would  not  flood  the  markets  with  a 


186  ELEMENTARY   ECONOMICS 

substitute  bearing  the  same  label,  nor  would  consumers  be 
able  to  choose  the  product  of  the  original  producer.  Hence 
the  trade-mark  establishes  a  bond  between  the  producer  and 
the  consumer,  which  the  producer  cannot  afford  to  break  by 
lowering  the  standard  of  his  product.  Consequently,  we  may 
say,  trade-marks  protect  consumers  to  a  large  degree  from 
imposition. 

Objections  urged  against  the  present  patent  law.  —  In  spite 
of  the  obvious  benefits  that  arise  from  granting  monopolies  to 
inventors,  there  are  those  who  argue  that  better  results  could  be 
obtained  by  withdrawing  government  protection  from  all  such 
enterprises.  This  argument  is  based  on  the  assumption  (1)  that 
genius  does  not  need  a  financial  stimulus ;  (2)  that  the  reward 
arising  from  this  form  of  monopoly  usually  goes  into  the 
pockets  of  unscrupulous  manufacturers  who  make  a  practice  of 
overreaching  inventors ;  (3)  that  patents  serve  as  the  basis  of 
objectionable  industrial  monopolies  ;  and  (4)  that  patents  are  of- 
ten bought  by  owners  of  similar,  but  inferior,  patents  merely  in 
order  to  suppress  them. 

43.   Regulation  of  Industrial  Monopolies 

The  early  trusts.  —  The  years  following  the  close  of  the 
Civil  War  saw  in  many  lines  a  bitter  struggle  for  business,  which 
produced  cutthroat  competition  and  consequently  a  loss  of 
profits.  The  natural  result  was  combination.  In  1879  the  first 
trust,  the  Standard  Oil  Company,  was  organized  under  the 
guidance  of  John  D.  Rockefeller.  The  plan  of  organization 
provided  that  the  owners  of  numerous  small  oil  refineries  located 
in  Ohio,  Pennsylvania,  and  New  York  should  place  their  stocks 
in  the  hands  of  nine  trustees  in  exchange  for  trust  certificates. 
These  trustees  carried  on  all  the  business  of  the  various  in- 
terested refineries  as  if  it  were  the  business  of  one  large  con- 
cern.    So  successful  was  this  plan  that  other  groups  of  in- 


GOVERNMENT   AND   PRODUCTION  187 

dustries  took  it  up,  notably  the  manufactures  of  whiskey  and  of 
sugar.  Between  1890  and  1892  several  of  the  state  courts 
declared  such  combinations  to  be  illegal  and  ordered  them  to 
dissolve.  This  was  the  end  of  the  trusts  proper,  though  the 
term  has  continued  down  to  the  present  time  to  designate  con- 
cerns supposed  to  possess  monopolistic  advantages. 

The  trust  movement.  —  The  dissolved  sugar  trust  iname- 
diately  reorganized  into  one  gigantic  corporation  under  a  New 
Jersey  charter.  The  oil  trust  followed  a  different  plan.  Mr. 
Rockefeller  and  his  associates,  having  secured  control  of  the 
more  important  refineries  that  had  composed  the  old  monopoly, 
carried  on  the  oil  business  down  to  1899  very  much  as  a  single 
organization  would  have  conducted  it.  In  that  year  the  re- 
fineries were  merged  into  a  single  large  corporation,  the  Standard 
Oil  Company  of  New  Jersey.  Both  reorganized  concerns  (the 
old  oil  and  sugar  trusts)  succeeded  so  well  as  to  cause  other 
enterprisers  to  investigate  the  advantages  of  combining  their 
respective  lines.  By  1898,  it  has  been  estimated  by  a  good 
authority,  eighty  so-called  trusts,  with  an  aggregate  capital- 
ization of  $1,000,000,000,  had  been  formed.  During  the  next 
six  years  the  movement  went  rapidly  forward.  At  the  begin- 
ning of  the  year  1904  the  number  of  trusts  exceeded  300,  and 
their  combined  capital  stock  exceeded  $5,000,000,000.  By  far 
the  largest  was  the  United  States  Steel  Corporation,  which 
boasted  a  capitalization  in  excess  of  $1,400,000,000.  In  time, 
as  we  might  suspect,  practically  every  productive  industry  in 
the  country  was  combined.  The  effect  on  investments  was 
important.  Capitalists  and  bankers,  even  the  most  con- 
servative among  them,  came  to  feel  that  the  risks  involved  in 
trust  investments  were  negligible.  Small  investors  caught  the 
feeling.  The  result  was  a  rush  to  buy  stocks  and  bonds.  The 
failure  of  the  ship-building  trust,  however,  awakened  the  in- 
vesting public  to  the  realization  that  the  risk  attached  to  the 


188  ELEMENTARY   ECONOMICS 

purchase  of  stocks  and  bonds  of  industrial  trusts  was  greater 
than  they  had  anticipated. 

Popular  feeling  aroused  against  the  trusts.  —  The  rise  and 
development  of  the  trust  movement  was  caused  and  accom- 
panied by  a  general  rise  in  the  prices  of  goods,  which  began  about 
1896.  The  public  soon  saw  the  rise  in  prices,  and  very  naturally 
they  attributed  it  to  the  trust  movement.  They  were  en- 
couraged in  this  belief  by  independent  concerns  which  had  felt 
the  weight  of  the  combinations,  also  by  various  groups  of  per- 
sons who  sincerely  believed  that  the  movement  was  a  menace 
to  the  best  interests  of  American  society.  More  influential 
than  either  of  these  was  the  designing  politician  who  saw  in  the 
growing  hostility  of  the  people  toward  the  trusts  an  opportunity 
to  further  his  own  interests.  Accordingly,  he  and  his  kind  went 
up  and  down  the  country  preaching  a  crusade  against  what  they 
delighted  to  call  the  "  unholy  alliance  "  of  capital.  It  cannot 
be  denied,  however,  that  the  trust  development  threatened  the 
best  interests  of  society,  nor  that  the  people  needed  to  be  aroused 
to  their  danger.  And  it  is  pleasant  to  record  that  the  people 
when  aroused  went  about  the  task,  somewhat  blunderingly 
perhaps,  but  in  a  spirit  of  justice,  to  purge  the  trusts  of  their 
evil  features. 

Evil  practices  of  the  trusts.  —  The  most  outstanding  ob- 
jection which  the  people  had  to  trusts  was  based  on  their  treat- 
ment of  independent  competitors.  For  years  it  was  the  common 
practice  of  the  Standard  Oil  Company,  as  we  have  already  seen, 
to  secure  lower  freight  rates  than  its  competitors,  thus  placing 
them  at  a  decided  disadvantage  in  the  matter  of  competing 
with  the  trust  in  the  sale  of  oil  products.  Other  combinations, 
notably  the  sugar  trust,  likewise  secured  discriminatory  rates 
from  the  railroads.  Second,  the  trusts  in  an  effort  to  crush 
competition  had  a  practice  of  lowering  prices  in  competitive 
markets,  and  of  recouping  themselves  by  higher  prices  in  the 


GOVERNMENT   AND   PRODUCTION  189 

markets  where  they  had  no  competition.  Both  these  practices 
the  people  condemned  on  the  ground  of  fair  play.  They  de- 
manded that  the  trusts,  while  they  might  be  entitled  to  the 
economies  that  arose  from  conducting  business  on  a  large 
scale,  should  not  use  unfair  methods  to  crush  their  small  rivals. 

Trust  regulation.  —  The  first  attempt  by  the  national  govern- 
ment to  curb  the  monopolistic  powers  of  the  trusts  came  even 
before  the  trust  movement  proper  had  got  under  way.  The 
practices  of  the  old  Standard  Oil  Company  operated  by  its  nine 
trustees  had  created  suspicion  in  the  minds  of  the  people.  Soon 
this  suspicion  was  changed  to  distrust.  Then  a  demand  arose 
for  some  sort  of  regulative  legislation.  The  result  was  the 
Sherman  Anti-Trust  Law  of  1890.  This  law  declared  illegal 
"  every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  among  the 
several  states,  or  with  foreign  nations."  It  also  declared  it  to  be 
unlawful  for  any  person  to  *'  monopolize,  or  attempt  to  monop- 
olize, or  combine  or  conspire  with  any  other  person  or  persons, 
to  monopolize  any  part  of  the  trade  or  commerce  among  the 
several  states,  or  with  foreign  nations."  The  essential  feature 
of  the  law  was  its  prohibition  of  the  restraint  of  trade. 

This  law,  as  we  have  seen,  was  designed  primarily  to  curb 
the  illegal  activities  of  the  trusts.  Yet  during  the  first  twenty 
years  of  its  existence  it  failed  signally  to  fill  the  want  for  which 
it  had  been  designed.  Suits  were  brought  under  the  act; 
yet  few  juries  were  found  that  could  distinguish  between 
reasonable  and  unreasonable  restraint  of  trade.  Strangely 
enough,  one  of  the  suits  successfully  prosecuted  was  directed 
against  a  Connecticut  labor  union  for  restraining  the  trade  of  a 
firm  of  hatters.  Finally  in  1910  the  government  succeeded  in 
having  both  the  Standard  Oil  Company  and  the  American 
Tobacco  Company  dissolved.  The  success  of  the  government 
in  these  cases  encouraged  the.  Department  of  Justice  to  in- 


190  ELEMENTARY   ECONOMICS 

stitute  other  suits.  Four  years  later  a  new  act  added  strength 
to  the  original  anti-trust  law  by  making  some  of  its  provisions 
more  definite. 

The  Clayton  Anti-Trust  Law,  enacted  in  1914,  exempted  labor 
unions  and  farmers'  cooperative  associations  from  anti-trust 
prosecution.  It  declared  illegal  certain  practices  of  one  cor- 
poration owning  stock  in  another  corporation,  and  expressly 
forbade  '*  unjustifiable  discriminations  in  the  prices  charged  to 
different  persons."  During  the  same  year  a  federal  trade 
commission  was  established  with  power  to  prevent  discrimina- 
tions in  commerce,  to  make  reports,  and  to  investigate,  at  the 
request  of  the  attorney  general,  alleged  violations  of  the  anti- 
trust laws. 

Significance  of  government  regulation.  —  The  interference  of 
the  government  in  industry  is  a  radical  departure  from  the 
older  notion  that  business  should  be  free  from  all  state  regulation 
or  oversight.  Radical  as  it  is,  the  change  from  laissez  faire 
back  toward  mercantilism  came  in  response  to  the  demand  of 
society  that  it  be  protected  from  its  most  powerful  industrial 
members.  Just  what  effect  the  various  anti-trust  laws  and  the 
court  decisions  based  on  them  have  had  on  production,  it  is 
impossible  to  say.  And  because  of  this  very  uncertainty, 
caution  and  care  must  be  exercised  by  the  government  in 
diverting  enterprise  from  one  channel  to  another.  Moreover, 
government  regulation  and  government  interference,  let  us 
remember,  are  likely  to  be  the  first  steps  toward  government 
ownership. 

44.   Regulation  of  Public  Utilities 

Early  experiences.  —  Our  notice  of  the  monopolistic  char- 
acter of  public  utilities  in  discussing  the  nature  of  monopolies 
paves  the  way  to  an  examination  of  the  methods  designed  by 
the  state  to  regulate  them.     Early  in  the  history  of  the  water, 


GOVERNMENT  AND  PRODUCTION  191 

gas,  and  electric  lighting  industries  the  government  exerted 
little  control  in  the  regulation  of  their  rates  and  services.  Much 
Uke  the  railroads,  these  industries  undertook  to  conduct  their 
business  with  little  regard  to  the  welfare  of  the  people  whom  they 
served,  and  here  again,  as  in  the  case  of  the  railroads,  the  people 
found  it  necessary  to  impose  regulations  in  order  to  protect  their 
own  interests,  and,  strange  as  it  may  sound,  the  interests  of 
these  industries.  In  many  sections  of  the  country  the  public 
was  not  easily  aroused.  To  many  the  difference  between  a  five- 
cent  and  a  four-cent  street-car  fare  was  insignificant.  Yet  in 
the  aggregate  it  mounts  high.  Likewise,  an  eleven-cent  electric 
rate  appeared  to  be  little  more  than  a  ten-cent  rate.  The 
corporations  themselves  sensed  the  danger,  but  instead  of 
correcting  existing  evils  many  of  them  tried  to  fortify  their 
position  by  packing  city  councils  with  employees  or  friends  of 
the  management.  As  a  result,  the  record  of  more  than  one 
American  city  is  besmirched  with  every  form  of  petty  manip- 
ulation, with  lobbying,  and  even  with  bribery.  Fortunately, 
the  good  judgment  of  the  people  led  them  to  see  that  they  were 
the  masters  of  the  situation.  The  result  was,  and  is,  that  con- 
ditions surrounding  the  services  of  public  utilities  corporations 
are  much  better  than  the  most  optimistic  would  have  predicted 
a  few  years  ago. 

Form  of  regulation.  —  In  the  matter  of  regulation  each  city 
may  take  one  of  two  courses.  It  may  by  an  ordinance,  as  is 
usually  the  case,  set  the  maximum  which  a  given  system  may 
charge  for  public  service  ;  or  it  may  own  and  operate  the  system, 
thus  securing  for  the  city  treasury  any  excess  which  under  the 
other  plan  would  go  into  the  pockets  of  individuals.  Ownership, 
on  the  whole,  has  been  confined  to  water  service,  though  many 
of  the  smaller  cities  and  towns  operate  their  own  lighting 
systems,  and  some  even  operate  their  own  gas  plants.  In  a 
few  of  the  larger  cities,  the  public  has  an  interest  in  the  local 


192  ELEMENTARY   ECONOMICS 

street-railway  system.     In  Chicago,  for  example,  the  city  shares 
in  the  profits  of  carrying  passengers  on  the  surface  lines. 

Even  those  who  have  objected  the  most  strenuously  to 
the  regulation  of  industrial  corporations  have  expressed  sym- 
pathy with  the  regulation  of  municipal  service  plants.  This 
regulation,  however,  is  beyond  the  discussion  stage ;  neverthe- 
less, as  intelligent  members  of  society  we  must  give  attention 
to  the  best  methods  of  regulation. 

45.   Fixing  Prices 

Nature  of  the  problem.  —  This  movement,  toward  what  many 
call  socialism,  manifests  itself  almost  exclusively  in  the  reg- 
ulation of  railroads,  public  utilities,  and  trusts.  We  have  had 
little  experience  in  fixing  prices  except  when  placed  under  the 
stress  of  war.  Obviously,  no  one,  not  even  the  government,  can 
anticipate  with  any  degree  of  accuracy  the  demand  for  a  given 
article.  And  just  as  obviously,  no  one  can  estimate  the  probable 
future  supply  of  such  a  product  as  com  or  wheat  or  cotton. 
Since  neither  the  demand  nor  the  supply  can  be  determined  in 
advance,  the  fixing  of  a  proper  price  is  a  difficult  task.  Not 
long  ago  a  government  official  went  to  the  heart  of  the  matter 
when  he  said  that  the  wisdom  of  fixing  a  wheat  price  at  a  certain 
point  could  be  determined  only  after  the  new  harvest  had  begun 
to  come  on  the  market.  If  the  price  had  been  too  high,  a  surplus 
of  the  old  crop  would  remain  unsold ;  if  too  low,  the  old  crop  would 
have  fallen  short  in  supplying  the  demand.  Allowing  for  other 
influences,  there  is  much  truth  in  the  statement. 

Experiments.  —  Under  the  stress  of  the  Great  War  the 
United  States  government  undertook  to  set  prices  on  numerous 
articles  of  everyday  consumption.  The  price  of  wheat  was  set 
at  a  figure  double  the  average  price  for  a  term  of  years  preceding 
the  outbreak  of  the  war.  Immediately  the  price  of  corn  began 
to  rise,  partly  on  account  of  the  high  price  of  wheat.     Then 


GOVERNMENT   AND   PRODUCTION  193 

wheat-growers  demanded  a  higher  price  for  their  product  on 
the  ground  that  they  could  make  more  money  raising  com. 
Here  we  have  the  inevitable  result  of  trying  to  fix  an  arbitrary 
price ;  and  undoubtedly  the  difficulty  explains  why  modem 
society  hesitates,  except  under  the  most  extraordinary  cir- 
cumstances, to  say  what  a  producer  shall  receive  for  his  product. 

EXERCISES  AND   PROBLEMS 


1.   What  are  the  chief  features  of  the  United  States  patent  laws? 
•     2.   Point  out  the  good  and  the  bad  phases  of  the  patent  system. 

3.  What  is  the  value  of  a   trade-mark  to  the   producer?  to  the 
consumer? 

4.  How  does  a  copyright  differ  from  a  patent? 

5.  What  is  a  trust? 

6.  Are  all  trusts  monopolies? 

7.  Are  all  monopolies  trusts? 

8.  Why  did  the  trust  movement  develop  so  rapidly  about  1900? 

9.  What  caused  popular  opinion  to  be  aroused  against  the  trusts  ? 

10.  What  were  some  of  the  objectionable  practices  of  the  trusts? 

11.  What  was  the  Sherman  Anti-Trust  Act? 

12.  How  did  this  law  affect  the  trusts? 

13.  How  has  this  law  been  strengthened? 

14.  What  is  the  difference  between  reasonable  restraint  of  trade  and 
unreasonable  restraint  of  trade? 

15.  Why  were   early  public  utility  corporations  given  so   many 
privileges? 

16.  Just  how  at  the  present  time  are  these  corporations  usually 
regulated  ? 

17.  What  experience  has  this  country  had  in  price-fixing? 

18.  Why  is  price-fixing  likely  at  all  times  to  be  unsatisfactory? 

B 

1.  What  steps  would  you  take  in  securing  a  patent? 

2.  Make  a  short  list  of  important  inventions  that  have  revolutionized 
American  life  and  industry.     Were  these  inventions  patented  ?     Which 


194  ELEMENTARY   ECONOMICS 

of  the  patentees  has  been  rewarded  adequately  for  the  labor  and  skill 
employed  in  perfecting  his  invention? 

3.  Mention  twenty  trade-marks  with  which  you  are  familiar. 

a.  Would  you  consider  them  as  assets  of  the  concerns  which  own 

them?     Why? 
h.  What  similarities  have  you  noticed  in  the  trade-marks  carried 

by  the  same  kinds  of  goods? 
c.  Why  do  business  firms  often  retain  the  names  of  members  who 

have  died  or  withdrawn? 

4.  Just  how  widespread  is  the  practice  of  securing  copyrights? 

a^  How  can  you  determine  whether  or  not  a  publication  is  copy- 
righted ? 
h.  Is  this  book  copyrighted?     What  is  the  evidence? 

c.  Make  a  list  of  ten  books  or  other  publications  not  copj^ighted* 

d.  Are  copyrights  owned  by  publishers  or  authors? 

5.  Name  ten  concerns  which  you  would  class  as  trusts. 
a.  How  many  of  the  ten  are  manufactures? 

h.  Which  of  these  appear  to  be  monopolies? 

c.  Which,  if  any,  have  resorted  to  unfair  competition  ?     Explain. 

d.  What  is  the  general  attitude  of  the  people  toward  them  ? 

6.  Make  a  list  of  the  public  utility  enterprises  in  your  community. 
a.  Which  of  these  are  publicly  owned? 

6.  Which  are  monopolies  ? 

c.  Why  does  society  permit  monopolies  in  these  enterprises  ? 

d.  To  what  extent  are  these  enterprises  regulated  by  law? 

c.   Is  this  regulation  as  effective  as  the  regulation  that  would  arise 
from  competition  ?     Explain. 


1.  "Some  people  deny  that  men  who  have  a  genius  for  invention 
and  discovery  require  any  special  inducement  to  follow  their  natural 
bent." 

a.  Just  how  does  a  genius  differ  from  other  persons? 
6.  Do  all  inventors  have  a  genius  for  invention  ? 
c.   Might  genius  be  stimulated  by  a  hope  of  reward? 

2.  Why  are  goods  sometimes  advertised,  "Not  made  by  a  trust " ? 

3.  During  the  early  years  of  the  trust  movement  the  argument  was 
frequently  heard  that  the  trust  excelled  all  other  forms  of  business 
organization  in  efficiency  and  economy. 


.    GOVERNMENT   AND   PRODUCTION  195 

o.  What  is  the  basis  of  that  argument  ? 

b.  In  what  respects  are  trusts  more  efficient : 

i.  In  organization? 
ii.  In  buying?  in  selling? 
iii.  In  transportation? 

c.  What  is  the  relation  between  this  increased   efficiency  and 

prices  ? 
4.   Because  of  increased  costs  of  labor  and  material  a  street-railway 
president  finds  that  a  five-cent  rate  does  not  bring  a  fair  return.     How 
would  he  proceed  to  secure  a  six-cent  rate? 

SUPPLEMENTARY   READING 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  195,  230-247. 
Fetter,  Economics,  Vol.  II,  pages  427-457. 
Johnson,  Introduction  to  Economics,  pages  137-150. 
Seager,  Principles  of  Economics,  pages  442-471. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  340-350. 
Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  II,  pages  410-442. 


PART  IV 

THE  EXCHANGE  OF  ECONOMIC  GOODS 


CHAPTER  XV 

USE    OF    MONEY   IN    MAKING   EXCHANGES 

46.   Characteristics  of  a  Good  Money 

The  process  of  selection.  —  The  universal  use  of  certain 
commodities  for  money  rests  on  social  experience,  and  not,  as 
many  believe,  on  some  fine-spun  theory  evolved  by  statesmen 
and  the  law  courts,  that  in  making  exchanges  one  commodity 
ought  to  be  preferred  over  another.  Among  the  early  Jewish 
patriarchs,  cattle  and  sheep  were  regarded  not  only  as  wealth, 
but  also  as  measures  of  wealth.  Homer,  the  Greek  poet,  speaks 
of  the  wealth  of  the  Greeks  in  terms  of  cattle.  Our  own  Amer- 
ican Indians  employed  shells  in  making  exchanges  among 
themselves;  some  African  tribes  use  cubes  of  salt  as  money; 
while  in  the  interior  of  Russia  tanned  hides  at  one  time  cir- 
culated as  a  medium  of  exchange.  Slowly,  but  obviously  not 
in  the  same  period  of  time,  each  independent  society,  employing 
the  selective  process  in  making  its  choice,  has  experimented 
with  various  coromodities  as  money. 

Value  characteristics  of  good  money.  —  Clearly  the  chief 
characteristic  which  any  commodity  must  enjoy,  if  it  is  to 
become  a  medium  of  exchange,  is  use  value;  that  is,  society  as  a 
whole  must  value  it  highly  enough  to  desire  to  possess  it  for  its 
own  worth  and  not  because  some  individual  or  some  government 
has  said  that  it  possesses  value.  Since  it  has  value  it  will  have 
acceptability  —  that  is,  it  will  be  desired  by  the  individual 
members  of  society.     If  the  members  of  any  social  group  prefer 

199 


200  ELEMENTARY   ECONOMICS 

cattle,  for  example,  to  all  other  forms  of  wealth,  then  cattle, 
other  things  being  equal,  naturally  become  the  medium  of  ex- 
change. 

Notice  that  the  last  statement  in  the  preceding  paragraph 
bears  the  qualification,  "  other  things  being  equal."  Cattle 
might  have  a  wider  acceptability  than  furs,  and  yet,  on  account 
of  their  small  value  compared  to  their  large  bulk,  be  less  desir- 
able as  a  money.  Diamonds,  on  the  other  hand,  might  also 
be  the  most  highly  and  the  most  widely  desired  commodity  in 
existence  without  becoming  a  medium  of  exchange,  simply 
because  a  diamond  possesses  too  much  valu6  compared  to  its 
size.  Also  the  value  t)f  the  commodity  which  is  to  serve  as 
money  must  be  reasonably  stable  —  that  is,  its  value  must  not 
vary  too  widely  or  too  quickly.  We  may  conclude,  therefore, 
that  the  value  characteristics  of  a  good  money  are  three  in 
number:  (1)  value,  (2)  reasonably  large  value  in  small  bulk, 
and  (3)  stability  of  value. 

Physical  characteristics  of  a  good  money.  —  Scarcely  less 
important  are  the  physical  characteristics  which  a  good  money 
should  possess.  Five  such  characteristics  may  properly  be 
examined  at  this  point :  (1)  durability,  (2)  portability,  (3) 
homogeneity,  (4)  divisibility,  and  (5)  cognizability. 

Any  commodity  that  is  to  serve  well  as  money  should  possess 
durability  to  a  high  degree.  Otherwise  it  would  wear  quickly 
in  its  passage  from  hand  to  hand,  and  even  deteriorate  while  in 
the  possession  of  its  owner.  Consequently,  perishable  goods, 
such  as  cattle,  furs,  tobacco,  and  even  wheat  and  corn,  have 
never  proved  satisfactory  as  mediums  of  exchange.  Clearly, 
durability  is  a  great  aid  to  stability  of  value,  since  the  new 
supply  of  a  durable  commodity  for  a  reasonably  short  period  of 
time  is  likely  to  be  small  compared  to  the  entire  stock  of  that 
commodity  already  in  the  possession  of  society.  If  wheat,  for 
example,  were  used  as  a  medium  of  exchange,  it  is  obvious  that 


USE   OF  MONEY   IN  MAKING  EXCHANGES        201 

its  value  would  fall  greatly  with  the  harvesting  of  each  new  crop 
and  rise  as  each  crop  was  gradually  consumed. 

The  second  physical  characteristic  of  a  good  money  is  port- 
abihty.  The  commodity  that- serves  as  money  must  be  moved 
from  point  to  point,  among  the  members  of  the  society  that 
uses  it.  Otherwise  it  is  not  money.  ^  This  movement  involves 
labor  and  expense.  Hence,  the  commodity  that  combines 
greatest  value  in  the  smallest  bulk,  if  we  consider  portability 
alone,  is  the  most  desirable  as  a  medium  of  exchange. 

A  good  money  must  also  be  homogeneous  —  that  is,  the 
commodity  from  which  it  is  made  must  be  of  the  same  quality 
wherever  it  is  found.  Obviously,  cattle  possess  this  char- 
acteristic to  a  very  low  degree,  for  scarcely  any  two  of  them  are 
alike.  Divisibility,  which  is  closely  related  to  homogeneity, 
simply  means  the  capability  of  a  commodity  to  be  divided 
without  destroying  its  value.  Here  again,  cattle  do  not  possess 
this  characteristic.  Neither  do  furs  or  diamonds.  Either 
loses  value  by  being  divided.  The  total  value  of  the  parts  of  a 
split  diamond  never  equals  the  value  of  the  original  stone. 

Any  commodity  that  is  to  pass  current  as  money  must  be 
capable  of  being  easily  recognized.  Otherwise  it  could  be 
counterfeited,  which  fact  in  itself  would  tend  to  destroy  its 
value  as  a  money  by  destroying  its  acceptability. 

Characteristics  of  gold.  —  Of  all  the  commodities  known  to 
mankind  gold  possesses  in  the  highest  degree  the  characteristics 
of  good  money.  Since  the  earliest  time  it  has  been  desired  for 
its  own  use  as  a  commodity.  Primitive  man  prized  gold  above 
all  other  metals.  From  it  he  made  rings,  chains,  and  other 
ornaments  that  appealed  to  his  vanity.  His  descendants  regard 
gold  in  much  the  same  way.  Gold  is  also  scarce  enough  to  make 
it  highly  valuable  compared  to  its  bulk,  and  yet  it  exists  in 
large  enough  quantities  to  permit  of  its  use  in  making  exchanges. 
Finally,  the  value  of  gold  is  stable,  though  we  must  not  get  the 


202  ELEMENTARY   ECONOMICS 

mistaken  idea,  which  some  have,  that  it  does  not  vary.  The 
reason  for  its  stabihty  is  that  the  supply  of  the  metal 
coming  from  the  mines,  in  any  year  let  us  say,  is  extremely 
small  compared  with  the  total  •  supply  in  the  possession  of 
society. 

Gold  possesses  also  to  a  high  degree  the  physical  character- 
istics of  a  good  money.  It  is  made  durable  by  combining  with 
the  *fine  metal  a  small  part  of  alloy.  Gold  wears  well  in  coins, 
though  it  is  best  preserved  by  molding  it  in  the  form  of  bars. 
Also  since  it  combines  a  relatively  high  value  with  small  bulk, 
gold  may  be  easily  carried  about.  The  homogeneity  of  gold  is 
well  known  to  every  student  of  chemistry,  who  learns  early  in 
his  course  that  it  is  a  chemical  element.  All  fine  gold,  therefore, 
is  exactly  alike,  whether  it  be  mined  in  South  Africa  or  in 
Alaska.  Gold  is  also  divisible.  No  change  in  its  shape  or 
form  affects  its  value.  Two  one-ounce  pieces  of  gold  are  worth 
exactly  as  much  as  one  two-ounce  piece.  Melting,  rolling,  or 
pounding  has  no  effect  whatever  on  the  value  of  fine  gold. 
Fifth,  gold  is  the  most  difficult  of  all  the  metals  to  counterfeit. 
Any  one  accustomed  to  handle  gold  money  can  detect  a  spurious 
gold  coin  at  a  glance. 

From  the  foregoing  discussion  of  the  qualities  of  a  good  money 
we  can  easily  see  why  society  has,  by  a  long  process  of  selection, 
chosen  gold  as  a  standard.  It  could  not  have  done  otherwise. 
Whether  or  not  gold  will  continue  down  to  the  end  of  time  as 
the  money  standard,  no  one  can  say.  We  are  reasonably  sure, 
however,  that  a  change  to  some  other  commodity  will  come 
only  when  that  conmiodity  shows  its  superiority  to  gold. 

47.  Uses  of  Money 

As  a  medium  of  exchange.  —  The  general  desire  for  a  com- 
modity, such  as  gold,  stimulates  its  acceptability  in  unlimited 
amounts,  since  each  individual  knows  that  his  neighbors  will 


USE    OF   MONEY   IN   MAKING    EXCHANGES         203 

gladly  accept  it  in  exchange  for  their  surplus  commodities. 
Such  a  commodity,  whatever  it  may  be,  we  call  money.  As  soon 
as  a  society  reaches  the  money  stage  of  economic  development 
its  exchanges  are  greatly  facilitated.  No  longer  is  it  necessary 
for  an  individual  who  desires,  let  us  say,  to  exchange  a  deerskin 
for  a  hat,  to  go  about  among  his  friends  seeking  another  in- 
dividual who  has  not  only  an  extra  hat  but  also  a  desire  to 
possess  a  deerskin.  Instead,  he  deals  with  two  different  in- 
dividuals, exchanging  his  deerskin  for  money,  and  carrying  the 
money  in  his  pocket  until  he  finds  some  one  who  has  a  hat  for 
sale.  In  one  respect  money  is  a  imiversal  mobilizer  of  goods  — 
that  is,  it  gives  mobiHty  to  the  exchange  of  goods.  If  we 
were  deprived  of  its  use,  a  large  part  of  the  energy  now 
expended  in  producing  goods  would  necessarily  have  to  be 
expended  in  bringing  together  traders  possessing  mutual 
demands. 

As  a  standard  of  value.  —  Money  serves  also  as  a  standard 
of  value.  It  is  a  common  denominator  to  which  all  other  values 
may  be  reduced.  We  speak  of  wheat  as  being  worth  two  dollars 
a  bushel,  meaning  thereby  that  two  dollars  exchange  for  a 
bushel  of  wheat.  Similarly  we  speak  of  com  being  worth  a 
dollar  a  bushel,  oats  fifty  cents  a  bushel,  and  eggs  twenty-five 
cents  a  dozen.  Here  we  have  but  four  facts  to  remember,  the 
prices  of  the  four  commodities  under  consideration  expressed  in 
a  money  unit.  Without  the  use  of  money  the  number  of 
relative  values  possible  to  express  among  the  four  commodities 
would  be  as  follows : 

One  bushel  of  wheat  =  two  bushels  of  com  =  four  bushels  of  oats  = 

eight  dozen  eggs. 
One  bushel  of  com  =  two  bushels  of  oats  = 
four  dozen  eggs. 
One  bushel  of  oats  = 
two  dozen  eggs. 


204  ELEMENTARY   ECONOMICS 

Expressed  in  the  form  of  a  ratio  the  relative  values  to  remember 
would  be : 

Wheat:  corn::  2: 1.  Wheat :  oats::  4:  1.  Wheat :  eggs  ::  8 : 1. 

Corn    :  oats : :  2 :  1.  Corn    :  eggs  : :  4 : 1. 

Oats     :  eggs : :  2 : 1. 

Thus  it  is  to  be  seen  that  there  are  six  barter  relations,  whereas 
but  four  appear  when  money  is  used.  As  the  number  of  commod- 
ities increases,  the  advantage  of  employing  a  money  unit  becomes 
more  evident :  ten  different  commodities,  having  a  total  of  ten 
different  values  expressed  in  money,  have  forty-five  relative 
values  when  expressed  in  terms  of  each  other. 

One  of  the  curious  things  about  a  money  unit  is  that  the 
unit  itself  does  not  necessarily  have  to  exist.  The  money 
unit  of  the  United  States  is  the  gold  dollar  (23.22  grains  of  fine 
gold),  yet  at  the  present  time  the  government  does  not  coin  gold 
dollars.  Furthermore,  prices  would  not  differ  in  the  least  from 
what  they  are,  had  no  gold  dollars  ever  been  minted.  Thus, 
the  disappearance  of  every  gold  dollar  in  existence  would  affect 
not  in  the  least  the  money  unit  of  the  United  States. 

As  a  standard  of  deferred  payments.  —  Since  money  serves 
so  well  as  a  medium  of  exchange  arid  as  a  measure  of  value,  it  is 
but  natural  that  credit  transactions  should  be  expressed  in 
the  same  unit.  An  enterpriser,  wishing,  for  example,  to  secure 
a  new  machine,  borrows  not  a  machine,  but  money  with  which 
he  can  purchase  the  machine.  Nor  does  he  expect  a  year 
hence  to  repay  the  loan  with  a  machine .  He  borrows  money  and 
he  repays  money,  both  he  and  his  creditor  having  every  assur- 
ance that  the  entire  transaction  will  be  carried  out  in  terms  of 
the  same  unit. 

Another  reason  why  money  is  usually  preferred  as  a  medium 
of  credit  transaction  is  because  of -its  stable  value.  As  we 
shall  see  in  a  later  chapter,  all  money,  including  gold,  fluctuates 
in  value,  yet  this  fluctuation  is  likely  to  be  relatively  small 


USE   OF  MONEY   IN  MAKING   EXCHANGES         205 

for  a  reasonable  period  of  time.  Both  debtor  and  creditor, 
then,  enjoy  a  reasonable  protection  when  money  is  the  medium 
by  which  debts  are  to  be  discharged.  Suppose  A  borrows  ten 
bushels  of  wheat  from  B,  agreeing  to  return  to  him  at  the  expira- 
tion of  one  year  the  ten  bushels  plus  interest.  A  bumper  crop  of 
wheat,  accompanied  by  a  large  decrease  in  price,  would  obviously 
give  A  an  undue  advantage  in  repaying  his  loan.  Conversely,  a 
short  crop  of  wheat  would  give  B  a  corresponding  advantage. 
No  such  fluctuation,  we  may  say  with  assurance,  will  occur  in 
the  value  of  gold. 

48.   Kinds  of  Government  Money 

Gold.  —  The  standard  money  unit  of  the  United  States  is 
the  gold  dollar,  weighing  25.8  grains  and  comprising  nine  parts  of 
fine  gold  to  one  part  of  alloy.  Other  gold  coins  are  double  eagle 
($20),  eagle  ($10),  half-eagle  ($5),  and  quarter-eagle  ($2^-). 
All  other  forms  of  our  money  are  directly  or  indirectly  con- 
vertible into  gold.  Any  holder  of  gold  bullion,  nine-tenths 
fine,  can  exchange  it  at  the  mint  or  other  proper  government 
depository  for  an  equal  amount  of  gold  coin  without  charge. 
Hence  we  speak  of  the  free  and  unlimited  coinage  of  gold,  free 
in  this  case  literally  meaning  gratuitous ;  that  is,  a  holder  of 
bullion  can  present  258  grains  of  standard  gold  and  receive  in 
return  a  ten-dollar  gold  piece. 

Inasmuch  as  the  standard  coin  is  made  of  gold,  it  necessarily 
follows  that  the  price  of  gold  cannot  vary  as  long  as  that  standard 
is  maintained.  Thus,  the  miner,  who  carries  standard  gold 
bullion  to  the  mint,  finds  ^y  a  simple  calculation  (480  -^  25.8) 
that  the  price  of  his  product  is  $18.60^  an  ounce.  This  price 
has  not  varied  in  many  years,  and  it  cannot  vary  as  long  as  the 
present  law  regarding  the  standard  coin  is  in  operation.  By 
exchanging  gold  coins  for  an  equal  amount  of  gold  bullion  of  the 
same  fineness,  the  government  maintains  a  parity  between  gold 


206  ELEMENTARY   ECONOMICS 

coin  and  gold  bullion.  In  other  words,  the  government  adds  no 
value  whatever  to  gold  bullion  by  converting  it  into  coins.  It 
merely  changes  the  bullion  into  convenient  forms  for  making 
exchanges,  indicates  each  coin's  weight  by  stating  its  value,  and 
undertakes  to  prevent  counterfeiting.  Since  neither  the 
changing  of  bullion  into  coin  nor  the  changing  of  coin  into  bullion 
has  any  effect  on  the  value  of  gold,  there  is,  as  we  might  expect, 
a  constant  flow  in  both  directions :  mine  owners  and  gold 
importers  carry  their  bullion  to  the  mints,  while  gold  exporters 
change  gold  coins  into  gold  bars.  Thus,  the  government 
mints,  on  the  one  hand,  and  the  melting  pots  of  private  in- 
dividuals, on  the  other,  perform  the  valuable  service  of  keeping 
gold  coin  and  gold  bullion  equal  in  value. 

Silver,  copper,  and  nickel.  —  The  United  States  government 
mints  also  several  different  kinds  of  silver  coins  —  dollars,  half- 
dollars,  quarter-dollars,  and  dimes.  The  silver  dollar,  which,  as 
we  shall  presently  see,  was  at  one  time  a  standard  alongside  the 
gold  dollar,  is  composed  of  nine  parts  of  fine  silver  to  one  part 
of  alloy  —  that  is,  it  is  nine-tenths  fine.  It  weighs  412.5 
grains,  of  which  371.25  grains  are  fine  silver.  The  silver  dollar, 
like  all  gold  coins,  is  an  unlimited  legal  tender  for  all  debts. 
This  simply  means  that  a  debtor  may,  unless- there  is  a  contract 
to  the  contrary,  discharge  his  debts  in  silver  dollars.  The  other 
three  silver  coins  have  the  same  fineness  as  the  silver  dollar, 
but  do  not  weigh  as  much  in  proportion  as  their  exchange  values 
indicate.  Two  half  dollars  do  not  weigh  as  much  as  one  dollar ; 
neither  do  four  quarters  nor  ten  dimes.  These  subsidiary  coins 
are  legal  tender  up  to  ten  dollars.  The  legal-tender  quality  of 
the  nickel  piece  and  the  copper  cent  is  limited  to  twenty-five 
cents. 

Representative  money.  —  Closely  akin  to  the  standard 
gold  dollar  and  to  the  one-time  standard  silver  dollar  are  the 
two  forms  of  representative  money  used  in  the  United  States. 


USE   OF  MONEY   IN  MAKING  EXCHANGES        207 


^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^HF^^^^^HiPV 

^ 

1 

J 

1 

f 

2 

Copyright  Underwood  <&  Underwood,  New  York 

How  Silver  Dollars  are  Stored  in  the  United  States 
Treasury. 


208 


ELEMENTARY   ECONOMICS 


One,  the  gold  certificate,  is  issued  by  the 
place  of  exactly  the  same  amount  of 

A.N  Account  of  Resumption,  from  Con- 
temporary Newspaper. 

RESUMPTION. 


Peace  from  the  Placid  Potomac  to  the 
Warbling  Wabasha 


COIN  IN  ABUNDANCE    EVERYWHEBE,    AKO 
IN  BUT  LITTLE  DEMAND. 


Hore  Gold  ReceiTCd  at  the  Ketr  York  Siib< 
Treasury  Than  Paid  Oat. 


Beports  from  FMIadelpMa,   Chicago,  8t   Louis, 
and  Many  Other  Points. 


GENERAL  FEEL.ING   OF  CONFIDENCE  FOR 
A  REVlVAIi  OF  BUSINESS. 


SPEECH  OF    HON.    JAMES   A.    GARFIELD    AT 
CHICAGO,  ON  HONEST  MONEY. 


CINCINNATI. 

Kesumption  resumed  yesterday,  and  nobody 
seemed  hurt  by  it.  There  was  about  as  much  stir 
over  It  as  as  though  it  "was  lot.  Theodore  Cook 
remarked  that  it  might  as  well  have  happened  six 
months  ago.  Tbe  Merchants'  National  Bank  didn't 
have  a  call  for  a  dollar  of  gold.  The  Third  National 
paid  out  a  solitary  twenty-dollar  gold  piece.  There 
vas  no  demand  at  the  National  Bank  of 
Commerce.  The  First  National  paid  out 
f  97  50  in  the  yellow  coin. 


government  to  take  the 
gold  deposited  in  the 
treasury.  Similarly, 
the  second  form,  the 
silver  certificate,  repre- 
sents deposits  of  silver. 
The  chief  reason  for 
substituting  the  former 
for  gold  coin  is  to  save 
the  wear  and  deterio- 
ration which  gold  suf- 
fers in  passing  from 
hand  to  hand.  The 
silver  certificate,  whik 
it  also  serves  to  save 
wear  on  silver  coins,  is 
issued  largely  because 
it  is  much  more  con- 
venient to  handle  than 
silver.  The  main  point 
to  notice  in  connection* 
with  gold  and  Silver 
certificates  is  that  hold- 
ers may  exchange  them 
at  the  United  States 
treasury  for  gold  or 
silver,  as  the  case  may 
be.  In  other  words, 
representative  money 
merely  represents  gold 
or  silver  which  the  gov- 
ernment keeps  in  trust 
for  its  holders. 


USE   OF  MONEY   IN   MAKING   EXCHANGES        209 

Government  credit  money.  —  Somewhat  different  from  rep- 
resentative money  is  the  credit  money  of  a  government,  which 
is  backed  not  by  an  equal  amount  of  gold  or  silver,  but  by  a 
reserve  fund  plus  government  credit.  The  credit  money  of  the 
United  States  government  is  United  States  notes,  popularly 
referred  to  as  greenbacks.  These  notes  were  first  issued  during 
the  Civil  War  and  are  legal  tender  in  unlimited  amounts.  For 
seventeen  years  their  value  in  terms  of  gold  fluctuated  from 
forty  cents  to  one  hundred  cents  on  the  dollar.  That  is,  they 
varied  from  a  high  point  where  they  equaled  gold  in  value  to  a 
low  point  where  a  dollar  note  was  worth  but  forty  cents  in  gold. 
Finally  in  1879,  after  a  four  years'  preparation,  the  government 
began  to  redeem  these  notes  in  gold,  dollar  for  dollar.  This  is 
known  in  our  financial  history  as  the  resumption  of  specie 
payments.  Since  that  time  they  have  circulated  on  a  par  with 
gold,  simply  because  every  one  knows  that  he  can  exchange 
them  for  gold  at  the  treasury. 

Since  the  government  does  not  maintain  a  dollar  in  gold  for 
every  dollar  of  notes,  the  question  may  properly  arise  how  the 
government  is  able  to  redeem  them  on  presentation.  The 
answer  involves  the  whole  basis  of  credit,  which  is  confidence. 
The  people,  firmly  believing  in  the  integrity  of  the  government, 
have  confidence  that  it  can  redeem  every  note  on  demand. 
Consequently,  no  one  presents  notes  for  payment  unless  he  has 
some  special  need  for  gold.  They  are  in  very  much  the  same 
frame  of  mind  as  the  bank  depositor  who,  hearing  that  his 
bank  was  about  to  fail,  demanded  to  withdraw  his  deposits. 
On  being  assured  that  the  bank  was  solvent  he  merely  remarked 
that  if  the  bank  had  the  money  to  pay  him  he  did  not  want  it ; 
if  it  did  not,  he  wanted  it  at  once. 

Three  kinds  of  bank  notes  also  circulate  widely  in  the  United 
States,  but  a  detailed  notice  of  them  must  be  deferred  to  a  later 
chapter. 


210  ELEMENTARY   ECONOMICS 

EXERCISES   AND   PROBLEMS 

A 

1.  Name  various  commodities  that  have  served  as  money. 

2.  What  must  be  the  chief  characteristics  of  a  good  money  ?     Why  ? 

3.  What  is  meant  by  the  expression,  "large  value  in  small  bulk"? 

4.  Would  diamonds  serve  well  as  a  medium  of  exchange?     Why, 
or  why  not  ? 

5.  Name  and  explain  the  physical  characteristics  of  a  good  money. 

6.  Discuss  the  characteristics  of  a  good  money  as  applied  to  gold. 

7.  Why  is  gold  the  most  generally  accepted  of  all  money? 

8.  What  are  the  uses  of  money? 

9.  What  are  the  advantages  of  money  exchange  over  barter  ex- 
change ? 

10.  What  is  the  standard  coin  of  the  United  States  ? 

11.  Is  the  ten-dollar  gold  piece  a  standard  coin?     Explain. 

12.  Does  the  value  of  gold  fluctuate  ?     Explain. 

13.  Does  the  price  of  gold  fluctuate?     Explain. 

14.  Why  is  it  not  unlawful  to  melt  gold  coins? 

15.  Name  the  different  silver  coins  in  circulation. 

16.  Are  any  of  these  coins  standard  money?     Explain. 

17.  Why  is  alloy  used  in  the  coinage  of  gold  and  silver  ? 

18.  Why  are  gold  and  silver  certificates  called  "representative" 
money? 

19.  Why  are  these  certificates  used  in  the  place  of  coins  ? 

20.  What  are  "United  States  notes"? 

21.  Why  are  these  notes  usually  referred  to  as  "greenbacks"? 

22.  Why  did  the  value  of  greenbacks  fluctuate  during  the  Civil  War  ? 

23.  Why  has  it  not  fluctuated  since  1879? 

24.  Is    the    government    prepared    to  redeem    all  greenbacks    on 
demand?     Why,  or  why  not? 

25.  Why  are  relatively  few  greenbacks  presented  for  redemption? 

B 

1.  Give  instances  of  where  you  have  used  money  as  a  medium  of 
exchange  ;    as  a*  measure  of  value ;    as  a  basis  of  credit. 

2.  Make  a  collection  of  silver  coins  both  new  and  worn. 
a.  Weigh  each  of  the  dollars. 

i.  What  does  the  new  dollar  weigh? 
ii.  Compare  it  with  the  weight  of  the  worn  dollar. 


USE   OF   MONEY   IN   MAKING   EXCHANGES         2H 

b.  Weigh  each  of  the  other  coins. 

i.  How  does  the  weight  of  the  new  half-dollar  compare  with 
the  weight  of  the  new  dollar?  the  new  quarter?  the  new 
dime? 
11.  Compare  weights  of  new  and  worn  fractional  coins. 

c.  Which  coins  show  the  greatest  proportionate  wear? 

3.   Get  permission  of  some  banker  to  examine  gold  coins,   gold 
certificates,  silver  certificates,  and  greenbacks. 
a.  Note  various  denominations  of  each. 
6.  Are   there    denominations   higher   or   lower    than    the   ones 

examined  ? 
c.  What  are  the  legal-tender  qualities  of  each? 


1.  Suppose  the  federal  government  should  decide  to  make  a  bushel 
(56  pounds)  of  shelled  corn  the  standard  money  unit : 

a.  Would  gold  be  robbed  of  its  value  ?     Why,  or  why  not  ? 

b.  What  difficulties  would  be  encountered  : 

1.  In  preventing  wide  fluctuations  in  value  ? 

li.  In  standardizing  the  new  money  unit  ? 
111.  In  transporting  money  ? 
Iv.  In  storing  money? 

c.  How  would  the  demand  for  representative  money  be  affected  ? 

d.  How  would  the  production  of  corn  be  affected? 

e.  Would  an  Iowa  corn  farmer  be  richer  or  poorer  as  a  result  of 

the  change?     Why? 

2.  Suppose  the  federal  government  should  decide  to  change  the 
money  standard,  displacing  the  gold  dollar  of  25.8  grains  (nine-tenths 
fine)  by  a  gold  "diller,"  of  equal  fineness,  weighing  40  grains. 

a.  How  would  the   amount  of  gold  money  in    circulation    be 

affected? 

b.  How  would  the  value  of  gold  be  affected  ? 

c.  Would  the  price  of  gold  be  changed  ?     How  ? 

d.  What  would  be  the  effect  on  the  prices  of  commodities  ? 

e.  How  would  gold  mining  be  affected  ? 

3.  A  well-known  public  man  asserted  a  few  years  ago  that  anything 
would  serve  acceptably  as  a  money  if  it  bore  the  government  fiat. 

a.  Have  governments  been  successful  in  creating  an  artificial 
currency  ? 


212  ELEMENTARY   ECONOMICS 

i.  What  was  "Continental  paper  money"? 
ii.  Sketch  briefly  the  history  of  the  greenbacks, 
ill.  What  served  as  money  in  the  Southern  Confederacy? 
h.  How  much  value  does  the  government  stamp  add  to  gold 

coins  ? 
c    What  causes  gold  coins  to  circulate? 
d.  What  causes  greenbacks  to  circulate? 
4.   "Representative  paper  money  is  not  money  at  all;    it  merely 
represents  money  held  by  the  government." 
a.  Define  "money." 

h.  Does  an  exchange  of  a  ten-dollar  gold  certificate  for  a  ten-dollar 
gold  coin  change  the  amount  of  money  in  circulation?  in 
the  treasury? 

c.  Suppose  the  government  should  spend  the  gold  held  to  redeem 

gold  certificates : 
i;  Would  they  still  be  "gold  certificates"?     Explain, 
ii.  Would  they  be  money?     Why,  or  why  not? 
iii.  How  would  their  value  be  affected  ? 

d.  Suppose  the  government  should  declare  gold  certificates  to  b« 

redeemable  like  greenbacks : 

i.  Would  t^hey  still  be  "gold  certificates"  ?     Explain, 
ii.  How  would  their  value  be  affected? 
iii.  How  would  the  value  of  greenbacks  be  affected  ? 
iv.  What  would  be  the  effect  on  government  credit  ? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  224-269. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  248-281. 
Fisher,  Elementary  Principles  of  Economics,  pages  144-164. 
Johnson,  Introduction  to  Economics,  pages  253-279. 
Seager,  Principles  of  Economics,  pages  322-340. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  449-465. 
Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  227-235. 


CHAPTER    XVI 

M0NET4RY  LAWS  ILLUSTRATED  FROM  THE  HISTORY 
OF   THE    UNITED    STATES 

49.   Some  Important  Monetary  Laws 

The  bimetallic  ratios.  —  Until  a  comparatively  recent  period 
bimetallism  prevailed  among  the  more  advanced  industrial 
nations  —  that  is,  they  employed  both  gold  and  silver  money 
standards.  Each  government  authorized  its  mints  to  manu- 
facture the  standard  coin  in  either  gold  or  silver,  their  relative 
weights  depending  on  some  previously  determined  ratio,  which 
hereafter  we  shall  call  the  mint  ratio.  Obviously,  at  the  same 
time  there  was  also,  a  market  ratio  between  these  metals,  just 
as  there  is  always  a  market  ratio  between  wheat  and  com, 
which  no  government  can  effectively  control.  Thus,  the  govern- 
ment could  fix  one  ratio  but  not  the  othfer.  Accordingly,  the 
two  ratios  were  seldom  the  same.  An  influx  of  gold  into  any 
country  tended  to  cause  the  value  of  that  metal,  as  compared 
with  silver,  to  fall,  while  an  outflow  of  gold  tended  to  cause  its 
yalue  to  rise.  In  the  first  case  gold  was  said  to  be  overvalued ; 
in  the  latter,  undervalued.  Both  terms,  as  used  in  discussions 
on  bimetallism,  create  unnecessary  confusion,  which  any  one 
of  us,  by  exercising  a  little  caution,  can  avoid.  Both  terms 
apply  to  the  value  set  by  the  mint.  If  an  oversupply  of  gold 
causes,  as  we  have  seen,  the  value  of  that  metal  to  decline  in 
the  markets  in  terms  of  silver,  then  at  the  mint,  where  the  ratio 
remains  constant,  it  is  obviously  overvalued.  Similarly,  an 
undersupply  of  gold  causes  it  to  be  undervalued  at  the  mint. 

213 


214 


ELEMENTARY   ECONOMICS 


To  give  concreteness  to  our  subject  let  us  assume  that  a 
government  fixes  the  mint  ratio  at  15  to  1,  which  means  that 
the  standard  silver  coin  shall  weigh  exactly  fifteen  times  as 
much  as  the  standard  gold  coin,  the  two  coins  having  the  same 
fineness  and  the  same  legal-tender  value.  If  in  the  market  of 
that  country  an  ounce  of  gold  will  buy  twenty  ounces  of  silver, 

World  Production  o^  Silver:   1865-1915,> 
(In  Millions  of  Ounces) , 


lOOiOOIOOIOOlflOlO 

ggOAoocococoatokOO) 


225 


then  it  is  clear  that  gold  is  undervalued  at  the  mint ;  and  that 
silver  is  overvalued.  Conversely,  if  an  ounce  of  gold  exchanges 
in  the  market  for  less  than  fifteen  ounces  of  silver,  fourteen  say, 
then  silver  is  said  to  be  undervalued  and  gold  overvalued.  The 
inability  of  any  government  to  change  its  mint  ratio  to  corre- 
spond with  the  daily  shifting  market  ratio  accounts  in  large 
measure  for  the  difficulties  encountered  in  trying  to  maintain 
a  bimetallic  standard,  and  for  its  abandonment,  as  practically 
all  of  the  leading  countries  have  done. 


MONETARY  LAWS  215 

Gresham's  law.  —  Under  a  system  of  bimetallism  the  coins 
made  from  the  undervalued  metal  tend  to  go  out  of  circulation. 
The  reason  for  this  is  not  difficult  to  understand,  since  the  under- 
valuation of  a  metal  means  that  it  has  higher  value  in  the  market 
than  at  the  mint.  Payments  will  be  made  preferably  with  the 
coins  of  the  overvalued  metal ;  with  the  result  that  the  coins 
of  the  other  metal  will  be  used  only  as  a  last  resort.  Thus, 
when  coins  of  two  standard  metals  circulate  side  by  side,  the 
coins  which  are  worth  less  as  metal  than  as  money  will  tend  to 
drive  out  of  circulation  the  coins  which  are  worth  more  as  metal 
than  as  money.  The  same  tendency  occurs  when  similar 
standard  coins  are  circulating,  if  some  of  them  are  worn  more 
then  others;  also  when  metal  money  and  paper  money  cir- 
culate, if  the  paper  money  is  depreciated.  We  are  now  pre- 
pared to  state  what  is  generally  known  as  Gresham's  law, 
named  after  one  of  the  advisers  of  Queen  Elizabeth :  When 
two  kinds  of  money  circulate  concurrently,  the  poorer  tends  to 
drive  the  better  out  of  circulation.  An  American  writer  puts  it 
forcefully  when  he  says  that  good  money  is  too  proud  to 
circulate  alongside  poor  money. 

Principle  of  elasticity  of  money.  —  A  third  important  mone- 
tary law  involves  the  relation  of  the  supply  of  money  to  the 
fluctuations  of  the  demand  made  on  this  supply.  In  every 
modern  business  community  there  is  more  or  less  of  a  seasonal 
demand  for  money  in  some  form.  Particularly  is  this  true  in 
agricultural  sections  at  harvest  time.  Then  farmers  hire 
additional  laborers  who  must  be  paid,  and  incur  other  expenses 
incidental  to  harvesting.  In  a  large  country  such  as  the  United 
States  this  seasonal  demand  mounts  into  hundreds  of  millions 
of  dollars.  Clearly,  business  operations  cannot  be  adjusted  so 
as  to  have  on  hand  this  enormous  sum  of  money  to  meet  the 
extra  demands  of  a  few  months  at  most.  And  it  need  not  be  so 
adjusted  if  some  provision  is  made,  such  as  we  now  have  in  our 


216  ELEMENTARY   ECONOMICS 

Federal  Reserve  Banking  Law,  for  increasing  the  amount  of 
money  to  meet  an  additional  demand  and  decreasing  it  again 
when  this  demand  has  passed  by.  A  monetary  system  which 
permits  of  this  expansion  and  contraction  is  said  to  be  elastic. 

From  our  description  of  elastic  money  we  readily  see  that 
credit  money  alone,  either  in  the  form  of  bank  notes  or  of 
government  notes,  serves  the  purpose.  No  reasonable  scheme 
can  be  had  which  would  permit  metallic  money  to  stretch  and 
contract  with  the  fluctuation  of  business  needs.  Mine  pro- 
duction could  not  be  speeded  up  sufficiently  to  meet  an  in- 
creased demand ;  and  if  such  were  possible^  we  can  think  of  no 
plan  for  taking  the  added  amount  out  of  circulation  when  there 
was  no  longer  need  for  it. 

Quantity  theory  of  money.  —  Whatever  the  permanent  supply 
of  money  may  be,  it  will  adapt  itself  to  the  social  needs  for 
money.  A  given  quantity  of  money,  say  lOx,  effects  the 
exchanges  of  a  country.  If  this  quantity  were  increased  to  12x, 
we  know,  speaking  generally,  that  the  new  amount  (12a:)  will 
be  used  in  effecting  the  same  kinds  and  number  of  exchanges  as 
lOo;  had  formerly  effected.  Thus,  in  each  exchange  twenty 
per  cent  more  money  will  be  used  than  was  the  case  before  the 
increase  —  that  is,  goods  in  every  case  will  command  more 
money  when  the  quantity  is  12a;  than  when  the  quantity  was 
10a;.  Measured  in  terms  of  goods,  the  value  of  money  has 
declined.  We  may  now  state  the  quantity  theory  of  money : 
Other  things  being  equal,  the  value  of  the  money  unit  varies  inversely 
with  the  supply  of  money. 

50.   Monetary  History  of  the  United  States 

Notes  of  the  first  and  second  United  States  Banks.  —  During 
the  greater  portion  of  the  first  half  century  following  the 
organization  of  the  national  government  in  1789,  the  notes 
issued  by  the  two  United  States  Banks   (first,   1791-1811,* 


MONETARY  LAWS 


217 


second,  1816-1836)  supplied  the  most  important  part  of  the 
country's  circulating  medium.  Each  bank  kept  an  adequate 
reserve  of  coin  with  which  to  redeem  its  notes.  Consequently, 
the  people  accepted  them  at  their  face  value.  Numerous  state 
banks  also  issued  notes,  which  usually  had  scarcely  more  than 
a  local  circulation  in  the  neighborhood  of  the  issuing  bank. 

Government   coinage.  —  Very   soon  after  the   organization 
of  the  first  United  States  Bank,  the  government  provided  a 

World  Production  of  Gold  :   1850-1915 
(In  Millions  of  Dollars) . 


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bimetaUic  coinage  system  (1792)  in  which  the  ratio  was  to  be 
15  to  r.  For  many  years  after  its  establishment  the  mint 
coined  comparatively  little  silver  or  gold  :  there  were  few  mines 
in  the  country,  foreign  coins  passed  current,  while  the  United 
States  banks,  as  we  have  seen,  provided  a  sound  and  uniform 
currency.     In  1834  the  mint  ratio  was  changed  to  16  to  1.     All 


218  ELEMENTARY   ECONOMICS 

the  while  the  market  ratio  was  in  the  neighborhood  of  15^  to  1. 
Hence,  the  first  coinage  law  (1792)  undervalued  gold  ;  the  second 
(1834)  undervalued  silver.  Neither  law,  despite  the  best 
efforts  of  the  lawmakers,  caused  gold  and  silver  to  circulate  side 
by  side.  The  holder  of  either  metal  —  coin  or  bullion  — 
followed  his  own  economic  advantage ;  he  paid  out  his  over- 
valued coins  and  sold  or  exported  his  undervalued  ones.  Since 
the  law  of  1834  tended  to  drive  silver  out  of  circulation  by  under- 
valuing it,  the  fractional  silver  coins  (half-dollar,  quarter-dollar, 
and  dime)  disappeared.  Consequently,  in  1853  the  weights  of 
these  coins  were  slightly  reduced  in  order  to  make  them  worth 
more  as  money  than  as  bullion.  Since  that  time  the  weights 
of  all  our  gold  and  silver  coins  have  remained  unchanged.  The 
discovery  of  gold  in  Cahfornia  in  1848  gave  an  impetus  to  gold 
coinage.  A  little  later  the  mints  were  turning  out  gold  coins  in 
excess  of  $25,000,000  annually.  During  this  period  an  impetus 
was  given  to  the  use  of  gold  and  silver  as  money  by  the  govern- 
ment itself,  which  refused  to  recharter  the  second  United  States 
Bank  (1832),  to  accept  state  bank  notes  in  payment  for  public 
land  (1836),  and  to  use  state  banks  as  public  depositories  (1846). 
•  Government  paper  money.  —  When  the  Civil  War  broke  out, 
the  circulating  medium  of  the  country  comprised  gold  coins, 
fractional  silver  coins,  copper  coins,  and  state  bank  notes. 
Soon  the  state  banks,  as  we  shall  see  in  the  next  chapter,  were 
compelled  to  suspend  specie  payments  —  that  is,  they  were  no 
longer  able  to  redeem  their  notes  in  gold  or  silver.  At  th^  same 
time  the  government  itself  also  suspended  specie  payments. 
The  result  was  a  serious  derangement  of  the  monetary  system. 
Congress  then  set  about  to  remedy  the  situation.  The  secretary 
of  the  treasury  was  authorized  (February,  1862)  to  issue  $150,- 
000,000  in  United  States  notes  (greenbacks).  Four  months 
later  Congress  authorized  a  second  issue  of  the  same  amount. 
Subsequent  issues  brought  the  total  amount  up  to  $450,000,000. 


MONETARY  LAWS  219 

The  government  had  no  reserve  of  gold  and  silver  with  which 
to  redeem  these  notes.  Hence  we  call  them  irredeemable  or 
inconvertible  paper  money. 

National  bank  notes.  —  The  year  following  the  issuance  of 
the  first  greenbacks  Congress  passed  the  National  Bank  Act 
(1863),  which  provided  for  the  establishment  of  banks  with 
federal  charters.  These  banks  were  required  to  invest  in 
government  bonds,  which  they  could  use  as  security  for  national 
bank  notes.  Two  years  later  the  government  gave  to  the 
national  banks  a  monopoly  of  bank-note  issue  by  imposing  a 
prohibitive  tax  on  state  bank  notes.  In  reality  the  govern- 
ment's credit  served  as  the  basis  of  national  bank  notes  as  well 
as  of  greenbacks,  for  neither  were  redeemable  at  the  time 
in  specie.  During  the  war  and  for  a  dozen  years  after  its 
close,  gold  was  kept  out  of  circulation  by  the  operation  of 
Gresham's  law.  The  only  money  the  people  in  general  saw 
during  this  period  was  greenbacks  and  bank  notes.  Gold  was 
bought  and  sold  just  as  was  wheat  or  com.  Any  one  desiring 
gold  for  export  could  always  find  it  for  sale  at  the  New  York 
Stock  Exchange  in  what  was  known  as  the  "  gold  room.'* 
There,  also,  the  importers  of  gold  could  find  buyers.  The  heavy 
issues  of  greenbacks  and  bank  notes  caused  prices  to  rise, 
since,  as  we  have  seen  in  the  discussion  of  the  quantity  theory 
of  money,  the  value  of  the  dollar  declined.  Another  objection 
to  both  greenbacks  and  bank  notes  was  that  they  were  in- 
elastic. The  government  could  not  regulate  the  amounts  of 
either  or  both  to  meet  the  seasonal  demands  for  money.  In 
this  respect  they  were  little  better,  if  any,  than  gold  or  silver 
coins. 

Resumption  of  specie  payments.  —  Soon  after  the  close  of 
the  war  there  arose  an  agitation  to  retire  the  greenbacks  from 
circulation,  and  to  return  to  a  "  hard  money  "  basis.  Many 
people  objected.     Finally  the  issue  was  compromised,  with  a 


220  ELEMENTARY   ECONOMICS 

moderate  reduction  of  the  amount  in  circulation.  The  next 
logical  step  was  to  devise  some  plan  for  redeeming  them  on 
demand,  when  presented  at  the  treasury.  After  considerable 
debate  and  discussion  both  in  and  out  of  Congress,  a  law  was 
enacted  (1875)  which  provided  that  beginning  with  January  1, 
1879,  the  government  would  pay  specie  for  greenbacks.  In 
anticipation  of  the  demand  that  might  be  made  on  him,  the 
secretary  of  the  treasury  began  to  accumulate  a  gold  reserve, 
which,  by  the  end  of  1878,  amounted  to  more  than  a  hundred 
million  dollars.  As  January  1,  1879,  drew  near,  the  premium 
on  gold  declined  until  it  disappeared.  Contrary  to  expectations 
the  people  did  not  rush  to  the  treasury  to  exchange  their 
greenbacks  for  gold.  The  mere  fact  that  the  gold  was  there 
sufficed. 

The  silver  question.  —  Two  years  prior  to  the  passage  of  the 
resumption  act,  the  government,  in  revising  its  coinage  laws, 
omitted  any  mention  of  the  standard  silver  dollar.  In  other 
words,  the  law  demonetized  silver.  This  legislation  is  usually 
referred  to  as  the  "  crime  of  73."  At  that  time  the  market 
value  of  the  371.25  grains  of  fine  silver  necessary  to  coin  a  dollar 
was  about  $1,003  in  gold.  Hence  no  one  was  willing  to  carry 
silver  bullion  to  the  mint,  for  by  so  doing  he  would  be  compelled 
to  exchange  $1,003  for  $1.00.  It  happened,  however,  that  just 
about  this  time  a  great  many  rich  silver  mines  were  opened  in 
the  western  part  of  the  United  States.  Consequently,  the  value 
of  silver  fell  until  its  market  value  was  less  than  the  old  mint 
value  —  it  fell  to  a  point  where  it  required  more  than  16  ounces 
of  silver  to  buy  one  ounce  of  gold.  Then  the  silver  miners  and 
their  friends  demanded  that  the  government  go  back  to  a  bime- 
tallic l)asis.  This  a  majority  in  Congress  was  unwilling  to  do. 
The  matter  was  finally  compromised  in  1878  with  the  enactment 
of  the  Bland- Allison  Law,  which  provided  that  the  secretary  of 
the  treasury  should  purchase  each  month  from  two  to  four 


MONETARY  LAWS 


221 


million  dollars'  worth  of  silver,  paying  silver  certificates  for  it. 
Silver  production  continued  to  increase.  In  1890  another  law, 
known  as  the  Sherman  Act,  was  passed.  It  required  the  secre- 
tary of  the  treasury  to  purchase  four  and  one-half  million 
ounces  monthly,  and  to  issue  in  payment  treasury  notes  redeem- 
able in  gold.     This  new  strain  was  too  much  for  the  gold  reserve, 

Market  Value  of  the  Silver  Dollar  in  Terms  of  Gold: 
1865-1918. 


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for  holders  of  silver  bullion  after  accepting  the  treasury  notes 
were  privileged  to  present  them  forthwith  for  redemption. 

The  government  was  now  at  a  point  where  it  had  t6  meet  the 
silver  question  squarely  and  without  flinching.  In  1893,  at  the 
instigation  of  President  Cleveland,  Congress  repealed  the 
Sherman  Act.  This  was  the  signal  for  the  friends  of  bimet- 
allism to  make  silver  more  of  a  political  issue  than  ever  before. 
Three  years  later  the  Democrats,  led  by  William  J.  Bryan,  made 


222  ELEMENTARY   ECONOMICS 

free  silver  their  paramount  issue.  They  pledged  themselves,  if 
returned  to  power,  to  remonetize  silver,  making  it  equal  to  gold 
at  a  ratio  of  16  to  1.  The  Republicans  declared  for  a  single 
gold  standard.  Each  party  was  divided  over  the  issue.  The 
*'  Gold  Democrats  "  nominated  a  ticket  of  their  own,  while 
many  western  Republicans  supported  Mr.  Bryan.  The  Re- 
publicans carried  the  day,  their  candidate,  William  McKinley 
of  Ohio,  being  elected  president.  Four  years  later  (1900)  the 
so-called  gold-standard  act  was  passed,  which  provided  definitely 
that  the  monetary  standard  of  the  United  States  should  be  the 
gold  dollar  of  25.8  grains,  nine-tenths  fine. 

The  experiences  of  the  United  States  in  its  monetary  legis- 
lation has  been  paralleled  in  every  other  modem  nation.  Every 
one  of  them  has  experienced  the  same  difficulties,  particularly  in 
trying  to  maintain  a  bimetallic  standard.  England  was  the  first 
to  adopt  the  single  gold  standard  (1816).  Other  European 
nations  held  back.  Finally  one  by  one  they  had  to  abandon 
their  attempts  to  keep  gold  and  silver  at  a  fixed  ratio,  until  now 
every  country  of  any  great  importance  is  on  a  gold  basis. 

Federal  Reserve  Bank  notes.  —  The  final  settlement  of  the 
silver  question  went  far  to  stabilize  our  monetary  system, 
but  it  did  not  add  elasticity  to  our  money.  Finally,  under  the 
stress  of  a  panic  (1907),  the  large  banks  of  the  country  issued 
clearing-house  certificates  on  their  own  credit  backed  by  the 
commercial  paper  which  they  had  in  their  vaults.  It  was  at 
once  seen  that  this  pointed  to  the  solution  of  the  vexed  problem 
of  elasticity.  Accordingly,  Congress  authorized  a  close  study 
to  be  made  of  the  monetary  systems  of  Europe  and  America. 
The  result  was  the  Federal  Reserve  Bank  Law  of  1913,  which 
proyided  that  regional  banks,  twelve  in  number,  can  issue  federal 
reserve  notes  to  member  banks  in  exchange  for  promissory  notes 
given  to  them  by  their  customers,  and  for  other  securities.  The 
result  is  an  elasticity  in  our  currency.     Now  when  a  bank  needs 


MONETARY   LAWS 


223 


money  to  meet  an  extraordinary  demand  it  can  get  it  quickly 
from  its  regional  bank.  Further  discussion  of  this  system, 
however,  must  be  deferred  to  the  next  chapter. 

Amount  op  Federal  Reserve  Notes  in  Circulation 
(In  Billions  of  Dollars) . 


3 

Jan.,  1915 
July,  1915 

2 

i 

1 

2 

i 

i 

i 

2 

i 

2 

i 

2Va 

Federal  Reserve  Notes  First  Issue,  November,  1914 
Declaration  of  War,  April,  1917 

/ 

VA 

Fourth  Liberty  Loan,  October,  1918 
Armistice  Signed,  November,  1918 

/ 

/ 

*'/2 

/ 

/ 

^^ 

/ 

2^4 
3/4 


^  Monetary  stock  of  the  United  States.  —  As  a  result  of  the 
various  monetary  laws  we  have,  exclusive  of  one-cent  and  five- 
cent  pieces,  ten  different  kinds  of  money,  all  based  on  the  stand- 
ard gold  dollar. 


Gold  Coins. 
Gold  Certificates. 
Silver  Dollars. 
Silver  Certificates. 
Fractional  Silver  Coins. 


Treasury  Notes. 

United  States  Notes  (greenbacks). 
Federal  Reserve  Notes. 
Federal  Reserve  Bank  Notes. 
National  Bank  Notes. 


Gold  certificates,  as  we  liave  already  seen,  merely  represent 
gold  coin  and  may  be  exchanged  for  it  at  the  treasury.  The 
government  is  prepared  also  to  exchange  gold  directly  for 
silver  dollars  and  fractional   silver  coins,  and   indirectly   for 


224  ELEMENTARY   ECONOMICS 

silver  certificates.  The  various  notes  too  can  be  exchanged 
either  directly  or  indirectly  for  gold.  Thus  we  see  that  the 
holder  of  any  form  of  American  money  can^  get  gold  for  it,  if 
he  proceeds  in  the  right  manner.  Because  of  this  significant 
fact,  Gresham's  law  is  iroperative ;  that  is,  there  is  no  good 
and  no  poor  money. 

EXERCISES  AND   PROBLEMS 


1.  Distinguish  between  the  mint  ratio  and  the  market  ratio. 

2.  Under  what  circumstances  is  gold  undervalued  ? 

3.  Why  is  a  system  of  bimetallism  difficult  to  maintain  ? 

4.  What  is  meant  by  the  expression  "elasticity  of  the  currency"? 

5.  Why  was  the  mint  ratio  changed  in  1834  ? 

6.  Which  metal  circulated  between  1792  and  1834?  after  1834? 

7.  What  was  the  "crime  of  73"?    Who  called  it    a  "crime"? 
Why? 

8.  Why  were  silver  dollars  not  being  coined  in  1872  ? 

9.  Who  began  the  agitation  to  remonetize  silver  ?     Why  ? 

10.  Point  out  the  essential  differences  between  the   Bland-Allison 
Act  and  the  Sherman  Silver  Purchase  Act. 

11.  Just  how  does  the  Federal  Reserve  Bank  Law  give  dasticity  to 
the  currency? 

12.  Name  the  various  kinds  of  money  in  circulation  in  the  United 
States. 

13.  Why  do  all  of  them  pass  at  their  face  value  ? 

B 

1.  Enumerate  the  various  kinds  of  metals  used  in  making  United 
States  coins. 

a.  Why  are  different  metals  used? 

6.  Which  of  these  metals  does  the  government  coin  freely  ? 

c.  How  does  it  get  the  other  metals  for  coinage  ? 

d.  Just  exactly  what  does  the  expression ' '  monometallism ' '  mean  ? 

2.  What  procedure  is  necessary  to  exchange  each  of  the  various 
kinds  of  money  for  gold? 


MONETARY   LAWS  225 

3.    Learn  from  some  banker  or  newspaper  the  present  market  ratio 
of  silver  to  gold. 

a.  What  changes  have  occurred  in  this  ratio  during  the  past  few 

years  ? 

b.  How  did  these  changes  affect  the  profits  of  the  government  in 

supplying  fractional  coins  ? 

c.  What  would  be  the  effect  if  the  government  should  now  return 

to  bimetallism  with  a  ratio  of  16  to  1  ? 


1.  During  the  free-silver  campaign  of  1896  many  believed  that  a^ 
change  of  the  mint  ratio  to  equal  the  market  ratio,  which  was  then 
about  32  to  1,  would  be  desirable. 

a.  What  was  the  basis  of  this  belief? 

h.  Would  the  adoption  of  the  proposed  change  have  solved  the 
problems  arising  from  bimetallism  ?     Explain. 

2.  The  story  is  told  of  a  congressman  who,  when  he  heard  a  colleague 
state  that  the  flow  of  gold  from  the  United  States  was  due  to  the  action 
of  Gresham's  law,  suggested  that  the  law  be  repealed.     Comment. 

3.  The  operation  of  Gresham's  law  is  closely  associated  with  every- 
day business  affairs. 

a.  Of  two  dimes  which  is  usually  spent  first,  Canadian  or  United 

States? 

b.  Of  two  five-dollar  gold  pieces,  one  new  and  the  other  worn, 

which  would  be  melted  down  for  the  purpose  of  making  a 
ring? 

c.  Would  new  or  worn  gold  coins  be  shipped  to  England  in  pay- 

ment for  goods  ? 

d.  Give  definite  reasons  for  each  of  the  three  answers. 

4.  How,  if  at  all,  would  the  value  of  money  tend  to  be  affected  by : 
a.  The  opening  of  new  gold  mines? 

6.  An  increase  in  the  production  of  goods? 

c.  An  increase  in  population  ? 

d.  An  increase  in  the  rapidity  of  the  circulation  of  money  ? 

e.  A  greater  practice  of  thrift  ? 

/.   An  increase  in  the  volume  of  banking  business  ? 
g.  A  change  in  the  weight  of  the  gold  dollar? 
h.  Increased  efficiency  in  manufacturing  ? 


226  ELEMENTARY   ECONOMICS 


SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  294-314 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  248-269. 

Fetter,  Economics,  Vol.  II,  pages  56-60. 

Fisher,  Elementary  Principles  of , Economics,  pages  223-232. 

Seager,  Principles  of  Economics,  pages  322-340. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  493-509. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  265-289. 


CHAPTER  XVII 
BANKING   AND   ITS    HISTORY 

51.   Development  of  the  Principle  of  Banking 

The  medieval  money-lenders.  —  Even  in  the  Middle  Ages, 
when  industry  was  backward  and  most  of  the  exchanges  were 
carried  on  by  barter,  there  were  accumulations  of  capital  in  the 
form  of  gold  and  silver.  Kings  levied  taxes  and  maintained 
treasuries;  and  borrowed  great  sums  with  which  to  carry  on 
war,  to  make  crusades,  or  to  provide  dowriefs  for  their  children. 
Merchants  and  traders,  too,  often  needed  more  ready  money 
than  they  themselves  possessed.  Consequently,  there  grew 
up  a  class  of  men,  confined  largely  for  religious  reasons  to 
the  Jews  and  the  Lombards,  who,  seeing  the  advantages  of' 
making  loans,  kept  their  wealth  liquid  —  that  is,  in  the  form  of 
gold  and  silver.  Obviously,  they  were  compelled  to  take  meas- 
ures for  protecting  themselves  against  thieves.  Soon,  we  may 
believe,  their  neighbors  who  had  surplus  funds  of  their  own  began 
to  leave  their  money  with  these  lenders  for  safe-keeping. 

Discovery  of  the  balance.  —  In  the  course  of  time  the  money- 
lenders (bankers)  made  an  important  discovery.  They  found 
that  their  neighbors  (depositors),  possessing  a  variety  of 
"  money  habits,"  left  a  portion  of  their  combined  deposits  in 
safe-keeping  all  of  the  time ;  that  is,  there  was  a  balance,  varying 
in  amount  from  day  to  day,  which  the  banker  might  use  as  if  it 
were  his  own.  With  this  knowledge  in  hand  the  banker  em- 
ployed a  portion  of  the  balance  in  his  own  business  or,  as  was 

227 


228  ELEMENTARY   ECONOMICS 

more  oftei;  the  case,  loaned  it  out  to  those  who  had  need  for 
money  and  who  could  give  proper  security.  Here,  it  is  be- 
lieved, is  the  origin  of  modern  banking. 

In  conducting  his  business  in  this  manner  the  banker  ran  the 
risk  of  being  unable  to  meet  unexpected  demands  by  his  de- 
positors. To  forestall  such  a  calamity  he  had  to  be  on  his 
guard  at  two  points.  First,  he  made  loans  only  for  short  periods 
of  time  and  on  good  security.  To  use  a  modern  banking  term, 
he  kept  his  funds  liquid.     Second,  he  kept  a  portion  of  the 

Bank  Check. 


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pilgrim  ^tate  panfe  of  IBositon 

<;hf     ^^.  M^y §J/j§r 


balance  as  a  reserve,  the  size  of  which  depended  on  his  experience 
as  a  banker  and  on  the  margin  of  risk  which  he  cared  to  assume. 
Later,  bankers  developed  a  plan  of  issuing  their  own  promises 
to  pay  (bank  notes)  to  borrowers,  undertaking  to  redeem  them 
on  demand.  Here  again  they  discovered  that  some  of  these 
notes  would  always  be  in  circulation.  Consequently,  they  kept 
on  hand  only  enough  gold  or  silver  to  redeem  the  notes  as  they 
were  presented.  Naturally  the  next  step  which  the  banker 
took  was  to  grant  business  men  the  right  to  check  on  him, 
each  securing  the  amount  of  his  credit  by  giving  the  banker 


BANKING   AND    ITS   HISTOii^  229 

security  in  the  form  of  a  promissory  note .  From  this  discussion  it 
may  be  seen  that  the  banking  business  is  built  on  confidence,  and 
that  without  it  there  would  be  neither  balances  nor  note  issues. 
The  two  chief  functions  of  a  bank,  then,  are  (1)  to  receive 
deposits  in  the  form  of  money  or  credit  and  in  turn  to  lend 
money  on  credit,  and  (2)  to  issue  notes.  In  this  country  no 
bank,  strictly  speaking,  possesses  the  second  function.  Its 
business,  therefore,  is  confined  chiefly  to  the  first  function, 
though  it  may  and  does  perform  many  minor  ones. 

52.   Different  Kinds  of  Banks 

Commercial  banks.  —  The  most  common  bank  of  all  is  the 
commercial  bank,  which  may  be  a  national  bank,  a  state  bank, 
or  a  private  bank.  It  gets  its  name  from  the  fact  that  it  confines 
its  business  largely  to  business  men,  receiving  their  deposits 
and  cashing  their  checks  as  they  come  in.  Commercial  bank 
loans  are  almost  invariably  for  short  periods  of  time,  usually 
thirty,  sixty,  or  ninety  days.  Hence  its  funds  are  liquid.  Con- 
trary to  the  generally  accepted  notion  among  some  classes  of 
people,  a  commercial  bank  is  anxious  for  its  customers  to  borrow 
its  funds  for  carrying  on  their  business.  Its  profits  depend 
almost  entirely  on  its  volume  of  loans,  and  its  prosperity  is 
intimately  bound  up  with  the  prosperity  of  its  customers.  For 
these  reasons  the  typical  American  banker  encourages  legitimate 
business  expansion,  and  treats  his  borrowers  with  the  greatest 
liberality  consistent  with  safety.  He  is  in  fact  more  of  a  public 
official  than  most  people  think,  for  his  business  must  be  con- 
ducted with  due  regard  for  the  well-being  of  society  as  well  as 
for  private  gain. 

Savings  banks.  —  A  savings  bank  differs  materially  from  a 
commercial  bank.  First  of  all,  a  true  savings  bank  is  a  mutual 
affair  conducted  primarily  for  the  benefit  of  its  depositors, 
though  in  some  sections  of  the  country  stock  savings  banks  may 


230  ELEMENTARY   ECONOMICS 

be  found.  In  states  where  there  are  no  savings  banks,  that 
function  is  performed  by  the  various  commercial  banks. 
Savings  banks  usually  receive  deposits  of  one  dollar  and  upward 
on  which  they  pay  interest,  do  not  pay  out  money  on  checks 
drawn  against  deposits,  and  may  require  a  formal  notice  of 
several  days  before  deposits  can  be  withdrawn.  Unlike  com- 
mercial banks,  savings  banks  usually  contract  loans  for  a  year 
or  more.  This  they  are  able  to  do  for  two  reasons.  First, 
they  seldom  have  extraordinary  demands  made  on  them  by 
depositors ;  and  second,  their  privilege  to  compel  depositors  to 
serve  formal  notice  of  withdrawal  gives  the  opportunity  to  raise 
the  required  cash  from  the  sale  of  mortgages,  bonds,  or  other 
securities.  Savings  banks,  by  receiving  small  amounts  and 
paying  interest,  encourage  thrift;  their  aggregate  deposits, 
exceeding  five  billion  dollars,  comprise  an  important  source 
from  which  industry  can  draw  capital. 

Trust  companies  and  investment  banks.  —  Many  of  the 
states  charter  trust  companies,  which  perform  in  general  the 
functions  of  commercial  banking  with  some  additional  func- 
tions, such  as  executing  trusts,  and  guaranteeing  titles  to  land. 
Some  of  our  largest  banks  are  trust  companies.  A  fourth  type 
of  bank,  the  investment  bank,  is  usually  a  private  institution,, 
which  concerns  itself  primarily  in  promoting  the  affairs  of  large 
industrial  organizations".  Such  a  bank  is  that  of  J.  P.  Morgan 
and  Co.  of  New  York.  This  bank  has  had  a  hand  in  organizing 
some  of  the  largest  industrial  concerns  in  the  country,  notably 
the  steel  trust.  It-  also  takes  an  active  interest  in  international 
banking,  maintaining  branch  banks  in  the  more  important 
foreign  financial  centers. 

The  Federal  Reserve  Banking  Law,  however,  authorizes 
national  banks  to  engage  in  foreign  banking,  and  some  of  them, 
notably  the  National  City  Bank  of  New  York,  are  rapidly  de- 
veloping in  this  respect. 


BANKING  AND   ITS   HISTORY  231 

53.  A  Bank  Statement 

Form  of  a  bank  statement.  —  Banks  from  time  to  time  are 
called  on  for  financial  statements.  Such  a  statement  indicates 
clearly  the  condition  of  the  bank  making  it.  On  one  side  are 
arranged  the  bank's  resources ;  on  the  other  its  liabilities.  The 
totals  must  always  be  the  same;  that  is,  at  all  times  a  bank's 
resources  exactly  equal  its  liabilities.  Since  a  bank  as  such  is 
an  inanimate  and  impersonal  being  it  cannot  own  property  or 
have  debts  in  excess  of  its  resources.  This  point  usually  proves 
to  be  a  stumbling  block  for  students,  which,  however,  can  be 
removed  with  a  little  care.  A  great  many  items  enter  into  a 
bank  statement,  but  for  our  purpose  we  need  only  choose  a  few 
of  the  most  important  ones. 

Liabilities 

Capital $100,000 

Surplus.     .....  40,000 

Undivided  profits    .     .  10,000 

Deposits 550,000 

Due  to  other  banks .     .  25,000 

$725,000  $725,000 

The  statement  explained.  —  Obviously  the  largest  and  most 
significant  item  among  the  resources  of  a  commercial  bank  is 
loans  and  discounts.  The  difference  between  a  loan  and  a 
discount  is  not  important  for  our  purpose  in  this  connectioti. 
In  one  case  the  borrower  receives  the  full  amount  of  his  prom- 
issory note,  paying  interest  on  his  loan  at  its  maturity;  in 
the  other,  he  has  his  note  discounted,  which  means  that  he 
pays  interest  in  advance,  having  it  deducted  from  the  amount 
shown  on  the  face  of  his  note.  He  may  even  ofTer  for  discount 
the  notes  of  his  debtors.  This  last  transaction  is  known  as  re- 
discounting.  A  bank  for  one  reason  or  another  is  likely,  at  any 
time,  to  possess  stocks  and  bonds,  though  the  smaller  commercial 


Resources 

Loans  and  discounts 

$600,000 

Stocks  and  bonds    . 

30,000 

Real  estate     .     .     . 

20,000 

Cash  on  hand      .     . 

30,000 

Due  from  other  banks 

45,000 

232  ELEMENTARY   ECONOMICS 

banks  prefer  to  confine  their  investments  to  loans  and  dis- 
counts. Real  estate  may  include,  not  only  the  banking  house 
and  its  site,  but  also  other  real  estate  items,  siich  as  a  farm  or  a 
city  lot.  The  meaning  of  cash  on  hand  is  obvious.  Every 
commercial  bank,  in  order  to  meet  the  daily  demands  of  its 
depositors,  must  keep  on  hand  a  supply  of  money  the  amount  of 
which  is  regulated  by  sound  business  practice  as  well  as  by  law. 

Promissory  Note. 


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<m.^^^^       ^^z^^ 


The  last  item  among  resources,  which  for  all  practical  purposes, 
is  a  cash  item,  includes  all  money  owed  by  other  banks.  Usually 
it  may  be  had  on  demand. 

More  difficult  to  understand  are  the  items  on  the  liability 
side  of  the  statement.  At  first  thought  capital  is  likely  to 
appear  as  a  resource  instead  of  a  liability.  It  will  be  an  aid  to 
clearness  if  we  remember  that  our  statement  represents  the 
affairs  of  a  bank  and  not  the  affairs  of  a  banker.  Since  the  bank 
owes  its  owners  the  amount  of  its  capital  stock,  clearly,  then, 
capital  is  a  liability.  Surplus  and  undivided  profits  are  liabilities 
for  exactly  the  same  reason.     The  one  is  earnings  set  aside  by 


BANKING  AND   ITS   HISTORY  233 

the  directors  to  strengthen  the  capital ;  the  other,  earnings 
which  may  eventually  be  either  paid  to  stockholders  in  the 
form  of  dividends  or  placed  in  the  surplus  fund.  Deposits 
possess  two  important  aspects.  First,  a  deposit  may  represent 
an  actual  deposit  of  money  in  a  bank,  which  the  depositor  may 
withdraw  on  demand.  Most  people  believe  that  a  deposit 
may  be  made  in  no  other  way.  In  holding  the  belief,  however, 
they  are  mistaken.  Bank  customers  deposit  not  only  money, 
but  also  the  proceeds  of  their  own  promissory  notes.  A  clothier, 
for  example,  fearing  that  he  will  not  have  enough  money  to  meet 
the  payments  of  his  spring  bills,  may  arrange  with  his  bank  to 
credit  his  account  with  the  amount  necessary  to  meet  them  as 
they  come  due,  securing  the  bank  with  a  promissory  note. 
Thus,  obviously,  a  deposit  may  be  made  without  the  use  of 
money.  Among  bankers  such  a  deposit  is  known  as  a  created 
deposit ;  and  the  checks  drawn  against  it,  as  well  as  all  other 
checks,  are  known  as  deposit  currency.  The  last  Hability,  dvs 
to  othet  banks,  shows  the  amount  our  bank  owes  to  other 
banks. 

54.  Banking  in  the  United  States 

Periods  of  banking  history.  —  Some  attention  has  already 
been  given  to  the  banking  his-tory  of  the  United  States  in  so  far 
as  it  relates  to  note  issue  —  issuing  of  paper  money.  We  may 
now  properly  examine  with  some  detail  the  part  these  in- 
stitutions played  in  the  industrial  development  of  the  country. 
As  a  mere  matter  of  convenience,  the  banking  history  of  the 
United  States  may  be  divided  into  four  periods :  (1)  the  United 
States  banks  (1791-1833) ;  (2)  state  banking  (1836-1863) ; 
(3)  national  and  state  banking  (1863-1913),  (4)  Federal 
Reserve  banking  (1913-19—). 

The  United  States  banks.  —  When  the  natiolial  government 
was  organized  in  1789  there  were  but  four  banks  in  the  whole 


234  ELEMENTARY  ECONOMICS 

country.  Alexander  Hamilton,  secretary  of  the  treasury,  "and 
others  recognized  the  need  for  a  banking  institution  to  assist 
the  government  in  handling  the  public  debt  and  in  transmitting 
government  funds  from  one  section  to  another.  Accordingly, 
in  1791  Congress  and  the  President  (Washington)  chartered 
the  first  United  States  Bank,  giving  it,  as  far  as  the  national 
government  was  able^  a  monopoly  of  banking  for  a  period 
of  twenty  years.  The  capital  stock  was  fixed  at  $10,000,000, 
of  which  the  government  was  to  own  one-fifth.  At  the  end  of 
twenty  years,  when  Congress  refused  to  renew  its  charter,  the 
bank  went  out  of  existence. 

During  the  next  five  years  the  banking  business  of  the  coimtry 
was  carried  on  by  state  banks  —  that  is,  banks  operating  under 
state  authority.  By  1816,  however,  it  had  become  apparent 
that  another  United  States  Bank  was  necessary  to  provide  a 
uniform  and  sound  currency  and  to  assist  the  government  in 
handling  the  public  debt  created  by  the  Second  War  with  Eng- 
land (War  of  1812).  Accordingly,  Congress  and  the  President 
'(Madison)  chartered  the  second  United  States  Bank.  The 
life  of  the  new  institution  was  twenty  years;  and  its  capital 
stock  was  $35,000,000,  one-fifth  of  which  was  to  be  owned  by 
the  government.  Besides  issuing  notes,  the  second  United 
States  Bank  served  as  a  depository  for  public  and  private  funds, 
bought  and  sold  domestic  and  foreign  exchange,  and  made  loans 
to  business  men.  As  yet  the  practice  of  using  bank  checks  was 
confined  to  a  relatively  few.  The  bank,  after  getting  a  bad 
start,  became  prosperous  and  fulfilled  the  expectations  of  its 
supporters  and  friends.  Unfortunately,  it  was  drawn  into 
politics  about  1830.  In  1832,  Congress  passed  a  bill  re- 
chartering  the  bank,  which  President  Jackson  vetoed.  The 
next  year  the  government  ceased  to  use  the  bank  as  a  depository 
for  public  funds.  At  the  expiration  of  its  charter  the  second 
United  States  Bank  became  a  state  bank;    and  the  second 


BANKING  AND   ITS   HISTORY  235 

experiment  of  the  United  States  in  creating  a  large  central 
bank  was  at  an  end. 

State  banking.  —  It  must  not  be  thought  from  what  has  been 
said  that  either  of  the  two  United  States  banks  had  enjoyed  a 
monopoly.  Numerous  state  banks  competed  with  them,  and 
opposed  them  at  every  point.  This  opposition,  in  fact,  accounts 
in  large  measure  for  their  downfall.  President  Jackson's  veto 
in  1832  caused  many  other  state  banks  to  be  organized.  During 
the  next  thirty  years  the  banking  business  was  characterized 
by  over-expansion  and  uncertainty.  Many  banks  issued  notes 
with  little  regard  for  their  redemption,  and  undertook  financial 
enterprises  out  of  all  proportion  to  their  resources.  During 
this  period,  however,  there  was  developed  the  idea  of  free 
banking.  Hitherto  it  had  been  the  practice  for  state  legislatures 
to  grant  special  banking  charters,  thus  opening  the  door  to 
favoritism  and  even  graft.  A  free  banking  law,  on  the  con- 
trary, permitted  the  establishment  of  a  bank  whenever  a  group 
of  men  who  desired  to  do  so  could  comply  with  a  general  banking 
law.  No  doubt  the  result  was  an  increase  in  the  number  of 
banks  in  the  country.  Yet  bankers,  as  never  before,  felt 
the  necessity  of  conducting  their  business  on  a  high  plane, 
since  they  were  no  longer  protected  by  the  difficulties  which 
competitors  would  have  in  getting  charters.  Such  was  the 
banking  situation  when  the  Civil  War  opened. 

National  and  state  banking.  —  The  National  Bank  Law  of 
1863  did  not  abolish  the  state  banks.  It  merely  set  up  another 
system  of  banking  alongside  them.  Since  that  time  the  two 
systems  have  grown  and  prospered;  the  chief  difference  be- 
tween them  being,  as  we  have  seen,  that  national  banks  may 
issue  notes  secured  by  government  bonds.  The  notion  generally 
prevails  that  national  banks  are  sounder  and  stronger  than  their 
state  competitors.  This,  however,  is  the  case  only  where, 
capital  and  business  integrity  being  equal,  state  laws  are  more 


236  ELEMENTARY   ECONOMICS 

lax  than  federal  laws.  Fortunately,  the  states  have  become  more 
strict  in  their  requirements,  until  now  many  state  banks  are  as 
rigidly  supervised  as  are  national  banks.  It  is  true  that  the 
largest  commercial  banks  in  the  country  operate  under  federal 
charters,  yet  some  of  the  oldest  and  soundest  banking  in- 
stitutions in  our  largest  cities  are  state  banks. 

No  account  of  banking  since  the  Civil  War  would  be  complete 
without  a  notice  of  commercial  private  banking.  In  some  of  the 
states,  banks,  so  far  as  the  law  is  concerned,  are  as  easily 
established  as  grocery  stores  or  restaurants.  In  those  states 
any  man  can  become  a  banker  by  announcing  that  fact.  To 
be  sure,  if  he  expects  to  do  any  business,  he  must  secure  a 
money  safe  and  a  set  of  books,  and  above  and  beyond  all  else 
he  must  possess  the  confidence  of  his  neighbors  and  business 
associates.  Such  a  bank  often  serves  as  good  a  purpose  in  a 
rural  community  as  would  a  national  or  state  bank.  But  in 
the  cities,  where  even  next-door  neighbors  are  unacquainted, 
the  private  commercial  bank  is  usually  undesirable.  This 
statement  is  particularly  true  of  unregulated  private  banks 
operated  in  foreign  sections.  There  the  people,  being  strangers 
to  our  methods  of  carrying  on  the  banking  business,  look  on  a 
bank  as  a  hank  whatever  may  be  the  character  of  its  organi- 
zation. They  do  not  understand  that  national  banks  are 
carefully  supervised  by  the  federal  government;  and  state 
banks,  by  the  state.  Since  private  banks  usually  have  no  such 
supervision,  customers  doing  business  with  them  are  ordinarily 
compelled  to  carry  at  heavier  risk  than  would  be  necessary  in 
dealing  with  a  national  or  state  bank. 

Federal  Reserve  banking  system.  —  Profiting  by  an  ex- 
perience of  more  than  a  half  century,  the  federal  government  in 
1913  provided  for  uniting  the  banking  strength  of  the  country 
without  robbing  the  banking  business  of  its  competitive  char- 
acteristics —  that  is,  provision  was  made  for  centralizing  bank- 


BANKING  AND   ITS   HISTORY  237 

ing  without  establishing  a  central  bank.  The  bank  law  of  that 
year  —  the  Federal  Reserve  Bank  Law  —  created  a  bank  board 
to  sit  at  Washington  which  should  have  general  charge  of  the 
twelve  regional  reserve  banks,  one  bank  being  situated  in  each 
of  the  twelve  districts  into  which  the  United  States  is  divided. 
It  provided  also  a  board  for  each  of  the  regional  banks,  and 
required  every  national  hank  in  the  country  to  become  a  member 
bank  of  its  regional  bank.  Furthermore,  it  permitted  state 
hanks  to  become  members,  provided  they  carried  on  their 
business  according  to  certain  specified  requirements  laid 
down  in  the  Reserve  Law  itself. 

We  have  seen  already  how  this  new  law  has  favorably  affected 
the  elasticity  of  the  currency.  It  is  an  improvement  over 
preceding  banking  laws  in  other  ways.  First,  it  tends  to  keep 
the  money  of  the  country  from  collecting  in  the  New  York 
banks,  as  was  formerly  the  case,  by  requiring  each  of  the  regianal 
banks  to  maintain  large  reserves  of  gold.  Second,  it  provides 
that  member  banks  may,  by  complying  with  certain  require- 
ments, borrow  from  their  respective  regional  banks.  Third,  it 
facilitates  the  collection  of  checks  drawn  on  one  bank  and 
cashed  by  another,  by  providing  that  regional  banks  shall  be 
clearing  houses.  Finally,  but  not  the  least  important  by  any 
means,  it  reduces  the  reserves  which  national  banks  were 
formerly  compelled  to  carry  for  the  protection  of  depositors. 
From  whatever  angle  we  may  regard  the  Federal  Reserve  Law 
and  its  operation,  we  must  conclude  that  it  is  by  far  the  best 
banking  legislation  the  United  States  has  yet  enacted. 


238  ELEMENTARY   ECONOMICS 

EXERCISES  AND   PROBLEMS 


1.  Who  were  the  Lombards? 

2.  Why  did  not  the  Christians  ordinarily  loan  money  ? 

3.  Why  may  a  banker  expect  to  have  a  balance  in  his  hands  ? 

4.  What  is  the  difference  between  bank  deposits  and  bank  notes? 

5.  What  are  the  essential  differences  between  a  commercial  bank 
and  a  savings  bank  ? 

6.  Why  does  a  bank  desire  to  loan  its  money? 

7.  What  is  the  difference  between  a  commercial  bank  and  a  trust 
company? 

8.  What  are  the  functions  of  an  investment  bank  ? 

9.  What  is  a  "bank  statement"? 

10.  What  is  the  difference  between  a  loan  and  a  discount  ? 

11.  Why  is  a  bank's  capital  a  liability? 

12.  Would  the  banker  consider  his  investment  a  liability  ?     Explain. 

13.  Define  "bank  deposit." 

14.  How  does  deposit  currency  differ  from  other  kinds  of  currency  ? 

15.  How  did  the  two  United  States  banks  differ  from  state  banks? 

16.  Describe  state  banking  between  1832  and  1863. 

17.  How  did  the  National  Bank  Act  affect  banking  in  the  United 
States? 

18..   In  what  respects  did  the  Federal  Reserve  Banking  Law  improve 
banking? 

19.  Just  how,  if  at  all,  was  this  system  instrumental  in  selling 
Liberty  Loan  bonds? 

20.  Locate  the  regional  banks. 


1.   Make  a  list  of  the  banks  in  your  community. 
a.  Which  of  these  are  : 
i.  Commercial  banks? 
ii.  Savings  banks? 
iii.  National  banks? 
iv.  State  banks? 
v.^ Private  banks? 


I 


BANKING  AND   ITS   HISTORY  239 

b.  Which  has  the  largest  capital  ?  the  smallest  capital  ? 

c.  Which  are  members  of  the  Federal  Reserve  Regional  Bank? 

d.  Which  own  bank  buildings  ?  which  rent  ? 

2.  Get  a  bank  statement  from  some  banker  or  from  a  newspaper. 
a.  Which  kind  of  a  bank  is  it  (national,  state,  etc.)? 

h.  Inquire  of  some  banker  about  any  items  you  don't  understand. 

c.  Divide  the  "cash  on  hand"  by  the  "total  deposits." 
i.  What  does  the  result  show  ? 

ii.  Do  you  consider  this  a  safe  margin?     Why? 

d.  Can  you  judge  the  age  of  the  bank  by  its  statement  ?     Explain. 

3.  Suppose  you  were  one  of  ten  persons  to  make  equal  deposits  of 
money  ($1000)  in  a  bank,  and  that  there  are  no  other  depositors. 

a.  Will  the  banker  be  likely  to  loan  any  of  this  $10,000?     Why? 

b.  Is  it  correct  to  say  that  you  have  $1000  in  this  bank.     Why? 

c.  Would  the  other  nine  persons  be  justified  in  making  the  same 

statement  ? 

d.  Have  the  ten  of  you. $10,000  in  this  bank? 

e.  State  exactly  what  each  of  the  ten  has. 
i.  Is  it  money  in  the  bank  ?  or 

ii.  Is  it  the  right  to  demand  money  of  the  bank? 

4.  Examine  a  bank  check. 

a.  How  many  names  appear  on  the  check? 
6.  Notice  that  it  is  payable  on  demand. 

c.  How  many  times  and  in  what  ways  does  the  amount  named  in 

the  check  appear? 

d.  What  is  the  difference  between  a  bank  check   payable  to 

bearer  and  one  payable  to  order  f 

e.  Would  a  check  be  a  legal  claim  if  it  were  written  on  a  sheet 

of  paper  twelve  inches  square?  on  the  margin  of  a  news- 
paper? on  a  cuff? 


1.  Turn  to  any  bank  statement  such  as  the  one  shown  in  this  chapter, 
and  determine  how  it  would  appear  after  each  of  the  following  trans- 
actions has  been  completed : 

a.  A  deposit  of  $10,000  in  money. 

b.  A  60-day  note  for  $2000  is  discounted  at  6%  and  one-half  of 

the  proceeds  is  left  on  deposit. 

c.  A  check  for  $1(XX)  is  cashed. 


240  ELEMENTARY   ECONOMICS 

d.  $3000  of  the  undivided  profits  are  credited  to  stockholders. 

e.  A  note  of  $5000  is  paid  in  cash. 

/.   Bonds  having  a  face  value  of  $1000  are  sold  for  $1050. 
2.   Explain  why  the  following  are  liabilities  : 
a.  Deposits. 
h.  Capital. 

c.  Surplus. 

d.  Undivided  profits. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  279-288= 

Ely,  Outline  of  Economics,  3d  ed.,  pages  282-315. 

Fetter,  Economics,  Vol.  II,  pages  95-129. 

Johnson,  Introduction  to  Economics,  pages  280-302. 

Seager,  Principles  of  Economics,  pages  341-356. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  518-553. 

Taussig,  Principles  of  Economics,  2d  ed.,*Vol.  I,  pages  331-399o 


CHAPTER  XVIII 

DOMESTIC   AND   FOREIGN    COMMERCE 

55.  Nature  and  Volume  of  the  Trade  of  the  United 

States 

Local  trade.  —  Despite  the  elaborate  territorial  division  of 
labor  which  this  country  enjoys,  there  still  remains,  in  addition 
to  retailing,  a  considerable  volume  of  local  trade.  Most  farmers 
have  surpluses  of  eggs  which  they  exchange  for  groceries,  while 
many  of  them  follow  the  practice  of  making  a  few  extra  pounds 
of  butter  each  week  for  the  local  trade.  Very  often  they  buy 
and  sell  grain,  hay,  and  foodstuffs  among  themselves,  and  even 
make  barter  exchanges.  Likewise  people  in  the  towns  and 
smaller  cities  have  business  relations  differing  somewhat  from 
ordinary  retailing.  They  exchange  labor  and  even  commodities. 
If  we  could  include  retailing  under  the  head  of  local  trade,  it 
would,  of  its  very  nature,  be  the  most  important  of  all  trade, 
since  all  goods  except  those  exchanged  directly  are  finally  re- 
tailed. 

Inter-regional  trade.  —  In  a  large  country  like  the  United 
States  the  value  and  importance  of  the  trade  and  commerce 
among  the  various  sections  are  very  great.  Each  section 
specializes  in  a  few  products,  thus  creating  surpluses  which 
find  their  way  into  every  other  section.  The  best  evidence  of 
this  movement  is  the  enormous  freight  traffic  of  our  railroads. 
Wherever  we  go  we  see  trainload  after  trainload  of  goods 
moving  in  all  directions :  food  eastward,  manufactured  goods 
westward,    wheat    southward,    cotton    northward.     A    hasty 

241 


242 


ELEMENTARY   ECONOMICS 


Foreign  Trade  of  the  United  States 
(In  Hundreds  of  Millions  of  Dollars). 


1860 
1865 
1870 
1875 
1880 
1885 
1890 
1895 
1900 
1905 
1910 

1915 

1916 
1917 

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DOMESTIC   AND   FOREIGN   COMMERCE  243 

examination  of  the  food  and  furnishings  even  of  a  modest 
home  will  show  the  significance  of  our  inter-regional  trade. 
Four  everyday  articles  of  food  —  sugar,  salt,  flour,  and  fruit  — 
may  represent  four  widely  separated  regions  of  the  country. 
Yet  because  they  are  so  common  we  are  likely  to  underestimate 
the  complexity  of  an  industrial  organization  that  places  them 
on  our  breakfast  table  every  morning,  and  to  overlook  the 
methods  by  which  every  producer  is  paid  for  his  product. 

Foreign  trade.  —  Foreign  trade  is  essentially  no  different 
from  domestic  trade.  It  rests  on  differences  in  climate,  soil, 
capabihties  of  workers,  and  standards  of  living  —  that  is,  on 
territorial  division  of  labor.  Much  of  the  domestic  trade  of  our 
country  resembles  foreign  trade  in  Europe,  for  the  area  east  of 
the  Mississippi  River  is  approximately  as  large  as  all  western 
Europe.  Thus  trade  between  New  York  and  Florida  is  much 
hke  the  trade  between  England  and  Spain.  Mere  distance, 
then,  is  not  an  important  characteristic  of  foreign  trade.  As 
we  shall  see  a  little  later,  the  chief  difference  between  domestic 
and  foreign  trade  is  that  the  latter  is  always  more  or  less  hindered 
by  national  boundary  lines,  and  by  differences  in  languages,  in 
customs,  and  in  money  units. 

Our  chief  interest  at  this  point  is  not  in  the  trade  itself, 
but  rather  in  the  methods  of  settling  accounts  among  individuals, 
among  sections,  and  among  nations.  The  getting  of  goods  from 
the  producer  to  the  consumer  is  a  matter  of  production;  the 
mechanism  employed  to  make  payments  by  the  consumer  to 
the  producer  is  one  of  exchange. 

56.   Paying  Trade  Debts 

Payments  in  money.  —  Obviously  the  simplest  method  to  be 
employed  in  paying  trade  debts  is  for  the  debtor  to  discharge 
his  obligation  with  money.  If,  as  is  often  the  case,  the  debtor 
should  hold  obligations  against  his  creditor,  he  can  discharge 


244  ELEMENTARY   ECONOMICS 

his  debt  by  paying  the  balance  in  money.  It  is  a  common 
practice  in  many  rural  sections  for  a  farmer  to  buy  his  supplies 
on  credit,  selling  his  surplus  products  at  harvest  time  to  the 
merchant  from  whom  he  had  purchased  supplies.  The  two 
accounts  are  compared  at  regular  intervals  and  the  balance  paid 
in  money. 

Payments  in  bank  checks.  —  A  more  conunon  practice,  in 
most  urban  communities  at  least,  is  for  debtors  to  discharge 
their  obligations  with  bank  checks.  In  that  case  the  local 
bank,  supposing  for  simplicity  there  is  but  one,  becomes  a 
clearing  house  for  the  settlement  of  local  accounts.  As  the 
checks  come  in,  the  bank's  bookkeeper  merely  credits  the 
amounts  of  the  checks  to  the  accounts  of  those  who  present  them 
and  charges  the  same  amounts  to  the  accounts  of  those  who 
drew  them.  It  often  happens  that  during  the  same  day  the 
maker  of  a  check  will  deposit,  for  credit,  checks  of  other  persons 
which  have  been  paid  to  him  by  his  debtors.  We  might  extend 
this  illustration  until  it  should  become  extremely  complex. 
Yet  two  facts  essential  to  a  proper  understanding  of  paying 
trade  debts  would  remain  unaltered.  (1)  Many  obligations 
are  discharged  in  modern  industrial  society  without  the  direct 
payment  of  money.  '  (2)  Ultimate  trade  balances  must  always 
be  paid  in  money. 

Open  accounts  and  trade  acceptances.  —  Inter-regional  trade 
debts  are  usually  handled  in  a  somewhat  different  manner. 
Sellers  of  goods  (goods,  wares,  merchandise,  or  agricultural 
products,  including  live  stock),  such  as  manufacturers  and 
jobbers,  may  have  their  accounts  paid  in  one  of  three  ways. 
They  may,  as  has  been  the  general  practice  in  the  United 
States  since  the  Civil  War,  simply  sell  to  their  customers  on 
open  account,  depending  on  each  customer  to  discharge  his 
obligation  at  the  expiration  of  some  specified  period,  as  thirty, 
sixty,  or  ninety  days.     Under  such  circumstances  the  only 


DOMESTIC   AND   FOREIGN    COMMERCE  245 

evidences  of  indebtedness  in  the  possession  of  the  seller  are  the 
entries  on  his  books,  the  correctness  of  which,  if  dispute  should 
arise,  it  may  be  difficult  to  prove.  The  Federal  Reserve 
banking  system,  however,  provides  for  trade  acceptances, 
which  differ  from  open  accounts.  In  addition  to  charging 
the  buyer  with  the  amount  of  his  bill,  the  seller  sends  him  a 
trade  acceptance  bearing  certain  specified  promises  previously 
agreed  on,  which  the  buyer  formally  accepts  by  signing  it.  The 
acceptance  now  possesses  all  the  characteristics  of  a  promissory 
note,  which  the  holder  (seller)  may  discount  at  his  bank  or  at 
the  Federal  Reserve  Bank.  Trade  acceptances  are  recognized 
by  business  men  as  being  superior  to  open  accounts.  They 
relieve  sellers  from  the  necessity  of  carrying  undue  risk,  in- 
crease the  borrowing  power  of  creditors,  make  commercial 
accounts  more  liquid,  and  compel  buyers  to  meet  their  obligations 
at  maturity. 

Domestic  bills  of  exchange.  —  Some  sellers  fesort  to  a  third 
method  to  collect  from  their  debtors  —  a  domestic  bill  of  ex- 
change. Let  us  suppose  that  a  corn-buyer  -in  Iowa  has  an 
order  for  a  carload  of  com  from  a  cattle-feeder  in  Pennsylvania. 
As  soon  as  he  has  loaded  the  car  he  gets  from  the  railroad  com- 
pany a  bill  of  lading  which  specifies  among  other  things  the 
amount  of  corn  in  the  car,  the  name  of  the  consignor  (shipper) 
and  the  name  of  the  consignee.  He  then  draws  a  draft  (domestic 
bill  of  exchange)  on  the  consignee  in  which  he  orders  him  to 
pay  at  sight  or  at  the  end  of  some  stipulated  period,  such  as 
sixty  days,  the  purchase  price  of  the  com.  Now  the  shipper  is 
ready  to  visit  his  banker.  He  presents  the  draft  and  the  bill  of 
lading  to  the  bank,  which  credits  his  account  with  the  amount 
named  in  the  draft.  There  are  now  three  parties  known  in 
the  transaction,  the  drawer  (shipper  of  the  com),  the  drawee 
(buyer  of  the  corn),  and  the  payee  (banker).  The  Iowa  bank 
now  sends  the  draft  with  attached  bill  of  lading  to  some  bank 


246 


ELEMENTARY   ECONOMICS 


in  the  neighborhood  of  the  drawee.  This  bank  presents  the 
draft  to  the  drawee,  who  either  pays  the  amount  named  in  it, 
if  it  is  a  sight  draft,  or  if  it  is  a  time  draft,  he  accepts  it  by 


Domestic  Bill  of  Exchange. 


^ 


.         .  [payee 


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^m?^ 


^.:^.%. 


toTteJ, 


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writing  across  its  face  the  word  accepted.  In  any  case  the  rail- 
road bill  of  lading  is  turned  over  to  him,  for  without  it  he  cannot 
get  possession  of  his  carload  of  corn. 

It  is  conceivable  that  a  Pennsylvania  manufacturer,  a 
neighbor  of  the  buyer  of  the  corn,  should  sell  several  machines 
to  a  hardware  merchant  in  the  Iowa  town  where  the  shipper  of 
the  com  lives,  and  that  he  too  should  draw  a  draft  on  the  mer- 
chant for  the  amount  of  his  bill.  If  the  two  amounts  were 
exactly  the  same  and  the  same  two  banks  handled  both  trans- 
actions, the  two  debts  would  be  canceled  without  shipping 
money  in  either  direction.  If  the  amounts  were  not  the  same 
the  difference  between  them  would  have  to  be  settled  in  some 
other  manner. 

These  various  movements  can  be  easily  seen  by  examining  the 
illustration  (Fig.  8,  page  247).  Provided  the  two  amounts  of 
money  involved  were  the  same,  the  Iowa  bank  merely  pays  to 


DOMESTIC   AND   FOREIGN   COMMERCE 


247 


the  corn-shipper  what  it  collects  from  the  hardware  merchant, 
while  the  Pennsylvania  bank  pays  to  the  manufacturer  what  it 
collects  from  the  buyer  of  corn.  In  both  cases  the  banks  charge, 
in  addition  to  a  nominal  fee,  interest  for  the  use  of  their  money. 


Corn 


Credit  from  Pennsylvania  Bank 


Draft  of  Com  Shipper 


Draft  of  Manufacturer 


Credit  from  Iowa  Bank 


Machinery 


Fig.  8. 


Foreign  bills  of  exchange.  —  Generally  speaking,  foreign 
bills  of  exchange  resemble  domestic  bills  of  exchange.  Foreign 
bills,  however,  have  two  features  which  domestic  bills  do  not 
have.  First,  there  is  the  necessity  of  converting  one  standard 
of  money  into  terms  of  another  standard  —  that  is,  a  bill 
drawn  in  dollars  payable  in  London,  for  example,  must  have  its 
amount  changed  to  pounds  sterling.  Second,  the  length  of 
time  required  and  the  expense  involved  in  shipping  gold  from 
one  country  to  another  are  usually  greater  than  would  be  the 
case  within  a  country. 

57.  The  Balance  of  Trade 

Par  of  exchange  and  the  gold  points. —  To  simplify  matters 
let  us  confine  our  attention  in  this  discussion  to  trade  between 
the  United  States  and  England.    Let  us  also  assume  that  all 


248  ELEMENTARY   ECONOMICS 

sales  are  made  with  the  agreement  that  debts  are  to  be  paid 
in  London  in  sterling  exchange. 

It  is  first  necessary  to  determine  the  par  of  exchange  between 
these  two  countries.  This,  however,  is  a  simple  matter.  It 
is  done  by  dividing  the  weight  of  the  fine  gold  in  a  dollar  into 
the  weight  of  the  fine  gold  contained  in  an  English  pound.. 
The  result  of  the  division  is  4.866.  Translated  into  terms  of 
dollars  the  par  of  exchange  is  $4,866. 

A  second  preliminary  notion  is  the  gold  points,  called  by 
some  authorities  the  gold  exporting  points.  Under  normal 
conditions  the  expense  involved  —  interest,  insurance,  and 
freight  charges  —  in  shipping  $4,866  in  gold  from  the  United 
States  to  England  is  about  two  cents.  Consequently,  we  say 
that  the  upper  gold  limit  is  $4,886  and  the  lower  limit,  $4,846. 
This  two-cent  margin  above  and  below  par  is  much  less  than 
it  was  a  century  ago ;  and  we  may  expect  it  to  decline  still 
more  in  the  future  with  a  decline  in  the  risks  involved  in  trans- 
portation, with  quicker  transportation,  and  with  a  reduction 
in  the  normal  interest  rate. 

Fluctuations  in  the  rate  of  exchange.  —  We  are  now  pre- 
pared to  examine  the  causes  for  fluctuations  in  the  rates  of 
exchange.  Let  us  suppose  that  New  York  importers  desire  to 
buy  a  million  dollars  worth  of  sterling  exchange  with  which  to 
discharge  their  debts  in  England.  Let  us  suppose  also  that 
exporters  have  sold  to  English  merchants  nine  hundred  thou- 
sand dollars  worth  of  goods  payable  in  London.  Let  us  suppose 
further  that  there  are  no  banks.  The  importers  will  seek  for 
men  who  have  debts  owing  to  them  in  London,  while  the  ex- 
porters will  be  on  the  lookout  for  men  who  are  under  obligation 
to  pay  debts  in  London.  The  former  desire  to  buy  credit,  the 
latter  to  sell  credit.  Obviously,  the  importers  could  ship  money 
to  England  with  which  to  pay  their  debts,  and  the  exporters 
could  have  the  money  owing  to  them  in  London  shipped  to 


DOMESTIC   AND   FOREIGN    COMMERCE  249 

New  York.  In  either  case  there  is  an  expense  of  two  cents 
per  sterhng  pound  —  that  is,  the  highest  price  importers  will 
pay  for  the  right  to  draw  money  in  London  is  $4,886;  the 
lowest  price  which  exporters  will  accept  for  the  right  is  $4,846. 
If  we  follow  out  our  assumption  we  can  conclude  that  the  ex- 
porters sold  all  their  rights  to  draw  money  in  London  at  or 
near  the  upper  gold  point,  while  the  balance  owed  by  the  im- 
porters, one  hundred  thousand  dollars,  was  shipped. 

Banks  serve  to  facilitate  matters.     An  exporter,  like  our  Iowa 
corn-shipper,  sells  his  foreign  bill  of  exchange  to  his  bank, 

Foreign  Bill  of  Exchange. 


FIRST 

^y^T/Tr^^y  New  rork,^^^<e^mJf/i/ ml. 

^Laz^^^ays  after  (k^A^of  this  FIRST  of  Exchange 
{Secorm  Unpaid)  pay  to  the  order  of 

Falue  received  and  charge  the  same  to  account  of  ^ 

LIVERPOOL    IMPORTING    COMPANY  (r'/u,<pA/,  e^m/Zfl/. 

Liverpool,   England 


which  sends  it  to  its  correspondent  bank  in  London.  The 
London  bank  presents  it  to  the  payer,  and  when  the  bill  is 
paid,  places  the  amount  received  to  the  credit  of  the  New  York 
bank  from  which  it  had.received  the  bill.  An  importer,  let  us 
say,  goes  to  the  same  New  York  bank  and  desires  to  buy  sterling 
exchange.  The  bank,  having  credits  in  its  correspondent  bank 
in  London,  can  accommodate  him.     What  will  it  charge  per 


250  ELEMENTARY   ECONOMICS 

sterling  pound?  If  it  has  relatively  large  balances  in  London, 
it  is  likely  to  charge  the  importer  between  $4,846  and  $4,866. 
If  its  balances  are  relatively  small,  the  price  is  likely  to.  be 
between  $4,866  and  $4,886.  The  bank  cannot  afford  to  lose 
more  than  two  cents  on  each  pound  sterling,  for  it  could  ship 
the  gold  from  London  to  New  York  at  that  expense.  Nor,  for 
the  same  reason,  would  the  importer  pay  more  than  $4,886. 
From  the  foregoing  we  see  that  the  rate  of  exchange  depends  on 
the  state  of  foreign  trade.  An  excess  of  imports  tends  to  cause 
the  rates  of  that  country  to  be  above  par ;  while  an  excess  of 
exports  tends  to  force  the  rates  below  par. 

Other  factors  in  the  balance  of  trade.  —  Hitherto  we  have 
noticed  only  the  importation  and  exportation  of  goods  between 
the  United  States  and  England.  We  must  now  give  attention 
to  other  factors  that  enter  into  determining  the  balance  of 
trade.  First,  there  is  a  steady  stream  of  credit  obligations,  such 
as  stocks  and  bonds,  flowing  between  the  two  countries.  An 
English  investor,  let  us  say,  orders  a  New  York  broker  to  buy 
for  him  a  number  of  Illinois  Central  railroad  bonds.  This 
transaction  has  the  same  immediate  effect  on  the  balance  of 
trade  as  the  same  amount  of  exports  from  the  United  States 
to  England  would  have  had.  Later,  however,  the  effect  on 
the  balance  of  trade  arising  from  paying  interest  on  these  bonds  is 
the  same  as  imports  from  England  to  the  United  States  would 
have  produced.  This  important  fact  is  the  basis  of  a  trade 
movement  which  many  people  fail  to  understand.  Before  the 
Great  War  the  annual  value  of  England's  imports  exceeded 
that  of  her  exports  by  several  hundred  million  dollars  —  that 
is,  England  had  an  unfavorable  balance  of  trade.  This  balance 
she  paid,  in  part,  with  the  interest  on  the  investments  EngUsh- 
men  had  made  in  American  industry.  Three  other  less  im- 
portant transactions  act  in  a  similar  manner:  the  money 
Enghsh  immigrants  residing  in  this  country  remit  to  their  folk 


DOMESTIC  AND   FOREIGN   COMMERCE  251 

in  England,  the  money  American  travelers  spend  in  England, 
and  the  freight  earned  by  EngUsh  vessels  carrying  American 
goods,  affect  the  balance  of  trade  exactly  like  the  payment 
of  interest  on  EngUsh  investments  in  this  comitry.  Hence  a 
creditor  people,  such  as  were  the  English  before  the  Great  War, 
might  easily  go  on  forever  with  an  unfavorable  balance  of  trade. 
Conversely,  a  debtor  people  might  also  continue  indefinitely  to 
export  more  than  they  import,  using  the  balance  to  pay  travelers' 
cheques,  immigrants'  drafts,  freights,  and  interest  charges. 
The  mere  fact,  therefore,  that  a  country's  trade  for  any  period 
of  time  is  highly  favorable  does  not  indicate,  as  many  people 
believe,  that  that  country  is  thereby  increasing  its  gold  supply 
by  having  the  balance  paid  in  that  metal.  Instead  of  gold  it  is 
more  likely  to  be  receiving  canceled  drafts,  bond  coupons,  and 
freight  receipts. 

We  may  now  extend  our  illustration  in  which  it  was  assumed 
that  imports  into  the  United  States  were  valued  at  one  million 
dollars  and  exports  at  nine  hundred  thousand  dollars.  Let  us 
assume  that  during  the  same  period  English  capitalists  invested 
$100,000  in  American  bonds,  that  $5,000  were  paid  to  English 
investors  in  the  form  of  interest,  that  American  travelers  spent 
$20,000  in  England,  that  EngUsh  immigrants  remitted  $15,000 
to  England,  and  that  English  merchantmen  earned  $25,000  in 
freights.     Our  accounts  for  the  United  States  would  then  be  : 

Cr.  Dr, 

Exports $900,000  Imports $1,000,000 

Investments     ...          100,000  Interest 5,000 

Balance  due  Travelers'  cheques     .  20,000 

English  exporters  .  65,000  Immigrants'  remittances       15,000 

Freight 25,000 

$1,065,000  $1,065,000 

Flow  of  gold  and  its  effects  on  prices.  —  We  may  now  turn 
to  a  consideration  of  the  last  step  in  settling  the  balance  due 


252  ELEMENTARY   ECONOMICS 

English  exporters,  which,  according  to  the  assumption  above,  is 
$65,000.  Export  bills  of  exchange  are  no  longer  to  be  had,  since 
the  total  amount,  $900,000,  has  already  been  absorbed  by  the 
importers,  who  originally  owed  $1,000,000  in  England.  A 
portion  of  the  $100,000  investment,  let  us  assume,  has  gone  to 
pay  interest  and  freight,  and  to  cash  travelers'  cheques  and 
immigrants'  remittances.  There  remain  then  but  $35,000  to 
be  applied  to  pay  on  the  balance  of  the  debts  of  American  im- 
porters, which,  we  have  seen,  was  $100,000  ($1,000,000  — 
$900,000).  Consequently,  gold  to  the  amount  of  $65,000  must 
be  exported  from  the  United  States  to  England.  This  is  the 
ultimate  means  employed  in  every  case  to  pay  balances  of 
trade. 

The  movement  of  gold  to  pay  balances  is  self-regulating. 
Let  us  suppose  that  year  after  year  it  is  necessary  to  ship  gold 
to  England  to  pay  balances  of  trade.  Gradually  the  supply 
of  gold  in  that  country  would  increase,  while  in  the  United 
States  it  Would  decline.  According  to  the  quantity  theory  of 
money,  which  is,  that  as  the  supply  of  gold  increases  its  unit 
value  decreases,  prices  in  England  would  tend  to  rise  while  in 
the  United  States  they  would  tend  to  fall.  England  would 
then  be  a  poorer  buying  market  and  a  better  selling  market 
than  would  be  the  United  States.  Consequently,  the  flow  of 
gold  from  the  United  States  to  England  would  decrease  while 
the  flow  in  the  opposite  direction  would  increase,  thus  lessening, 
if  not  entirely  destroying,  the  balance  in  favor  of  England. 
Because  of  this  self-regulation,  statesmen  and  bankers  no 
longer,  as  they  once  did,  look  with  great  disfavor  on  a  flow  of 
gold  from  the  country.  They  know  that  if  it  is  needed  here  it 
will  flow  back  in  response  to  a  lowering  of  prices. 


I 


DOMESTIC   AND   FOREIGN   COMMERCE  253 

EXERCISES  AND   PROBLEMS 


1.  Why  do  individuals  exchange  goods? 

2.  What  is  the  essential  difference  between  domestic  trade  and 
foreign  trade  ? 

3.  What  is  the  basis  of  foreign  trade? 

4.  What  is  a  "bill  of  exchange"? 

5.  What  is  a  "bill  of  lading"? 

6.  Define  "par  of  exchange." 

7.  How  is  it  determined  between  any  two  countries? 

8.  What  persons  deal  in  foreign  exchange  ? 

9.  What  are  * '  gold  points ' '  ? 

10.  How  are  these  points  determined? 

11.  What  cause  the  rates  of  exchange  to  fluctuate? 

12.  How  are  these  rates  restricted  by  the  gold  points  ? 

13.  Explain  "favorable  balance  of  trade"  ;  "unfavorable  balance  of 
trade." 

14.  Is  an  unfavorable  balance  of  trade  necessarily  disadvantageous 
to  a  country?     Why,  or  why  not? 

15.  How   may   a   country   maintain   indefinitely   an    unfavorable 
balance  of  trade? 

16.  How  does  a  country  that  has  no  gold  mines  get  its  supply  of 
gold  coins? 

B 

1.  Examine  the  articles  in  your  own  home  or  in  the  schoolroom 
and  try  to  determine  which  of  them  were  produced : 

a.  In  your  own  community. 

b.  In  your  own  state. 

c.  In  the  United  States. 

d.  In  other  American  countries. 

2.  Secure  a  domestic  bill  of  exchange  from  some  bank. 

a.  Fill  it  out  as  if  you  had  sold  a  carload  of  corn  to  James  White, 

payable  in  sixty  days. 

b.  What  would  be  the  next  step  in  the  transaction? 

c.  How  will  the  bill  look  after  its  acceptance  by  White? 

d.  Who  is  likely  to  hold  the  bill  until  it  matures? 

e.  How  does  the  accepted  bill  differ  from  a  promissory  note  ? 


254  ELEMENTARY   ECONOMICS 

3.  The  French  monetary  unit  is  the  gold  franc,  containing  4.48 
grains  of  fine  gold. 

a.  How  many  francs  can  be  coined  out  of  a  United  States  gold 

dollar? 
h.  This  number  represents  the  "French  par  of  exchange." 
c.   Estimate  the  gold  points. 

4.  Make  a  list  of  transactions  coming  under  your  own  observation, 
which  would  affect  the  rates  of  exchange  between  your  community  and 
New  York  City ;  the  rate  of  foreign  exchange  between  New  York  and 
South  America. 

C 

i.  How  could  each  of  the  following  affect  the  rate  of  exchange 
between  the  United  States  and  England : 

a.  Failure  of  the  wheat  crop  in  the  United  States  ? 
h.  The  building  of  an  American  merchant  marine  ? 

c.  The  purchase  of  London  city  bonds  by  New  York  bankers  ? 

d.  The  return  of  British  immigrants  to  the  mother  country? 

e.  The  decline  of  gold  production  in  the  United  States  ?  in  South 

Africa? 

2.  How  would  the  gold  points  on  sterling  exchange  be  affected  by  : 
a.  Change  in  the  interest  rates  from  5  to  4  per  cent  ? 

h.  Improvement  in  shipbuilding  ? 

c.   Establishing  aeroplane  traffic  between  the  United  States  and 
England? 

3.  Suppose  the  imports  from  England  exceed  our  exports  to  that 
country.     How  is  this  trade  condition  likely  to  affect : 

o.  The  rate  of  sterling  exchange  in  New  York  ? 
6.  Prices  in  the  United  States?  in  England? 

c.  Probable  future  trade  movements  ? 

d.  Profits  of  exporters?  of  importers? 

4.  It  has  been  proposed  that  the  nations  of  the  world  should  adopt 
a  uniform  currency.     How  would  such  a  proposal,  if  carried  out,  affect : 

a.  Par  of  exchange  ? 
h.  Rates  of  exchange? 

c.  Gold  points  ? 

d.  International  trade? 
6.   Domestic  trade  ? 

/.   Gold  mining? 

g.   Issue  of  paper  money? 


DOMESTIC  AND   FOREIGN   COMMERCE  255 


SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  373-410. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  345-367. 

Fetter,  Economics,  Vol.  II,  pages  185-198. 

Johnson,  Introduction  to  Economics,  pages  324-347. 

Seager,  Principles  of  Economics,  pages  365-382. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  587-612. 

Taussig,  Principles  6f  Economics,  2d  ed..  Vol.  I,  pages  480-507. 


CHAPTER  XIX 
THE   TARIFF  IN   THE    UNITED    STATES 

58.   Historical  Sketch 

Advances  to  a  protective  rate.  —  The  first  forty  years* 
experience  of  the  United  States  in  tariff  legislation  resulted 
in  a  movement  from  moderately  low  rates  to  rates  too  high  to 
be  endured  by  certain  sections  of  the  country.  The  first  tariff 
act,  which  was  passed  in  1789,  was  intended  by  Congress  pri- 
marily as  a  revenue  measure,  though  it  did  give,  as  its  preamble 
states,  a  degree  of  protection  to  a  few  industries.  During  the 
next  twenty-five  years,  tariff  legislation  received  little  attention 
at  the  hands  of  the  lawmakers :  in  1804  an  increase  of  five  per 
cent  was  made  for  raising  funds  for  the  Barbary  War,  and  in 
1812,  in  order  to  raise  revenue  for  carrying  on  war,  the  rates 
were  doubled. 

The  first  real  demand  for  a  protective  tariff  came  at  the 
close  of  the  War  of  1812,  when  American  manufacturers  found 
the  home  trade  which  they  had  built  up  during  the  war  seriously 
threatened  by  English  exporters  who  were  flooding  the  American 
markets  with  English-made  goods.  Congress  and  President 
Madison,  realizing  the  justice  of  the  demand,  agreed  to  a  new 
tariff  law  which  should  give  special  protection  to  woolen  and 
cotton  goods  by  imposing  various  rates,  some  as  high  as  twenty- 
five  per  cent,  on  all  such  goods  imported  into  the  United  States. 
During  the  next  few  years,  however,  the  opinion  grew  rapidly 
in  the  South  that  the  rates  of  1816  were  harmful  to  the  interests 
of  that  section.     Portions  of  New  England,  too,  favored  lower 

256 


THE   TARIFF   IN   THE   UNITED   STATES  257 

duties.  This  was  the  feeUng  when  Congress  took  up  the 
tariff  question  in  1824.  Representatives  from  the  middle 
states,  from  Kentucky,  and  from  portions  of  New  England 
supported  protection.  The  opposition  leaders  came  from  the 
South  and  from  New  England.  After  protracted  debate  the 
friends  of  protection,  led  by  Henry  Clay,  secured  a  continuation 
of  the  rates  on  woolen  and  cotton  cloth ;  also  increases  in  rates 
on  other  goods,  notably  iron. 

The  next  seven  years  saw  the  Union  almost  broken  asunder 
over  the  question  of  protection.  The  manufacturers,  dis- 
satisfied with  the  legislation  of  1824,  set  up  an  agitation  for 
higher  tariff  rates.  By  this  time  the  South  was  disgusted  with 
what  its  leading  men  said  was  the  ''  greediness  of  the  North." 
But  the  question  would  not  be  quiet.  Accordingly  in  1828 
Congress  once  again  took  the  matter  under  advisement.  The 
debate  that  followed  showed  the  South  arrayed  against  the 
North,  with  the  West  divided.  John  C.  Calhoun  of  South 
Carolina  and  other  Southern  members  of  Congress  left  nothing 
undone  to  convince  their  colleagues  that  an  increase  in  tariff 
rates  would  be  not  only  an  injustice  to  the  South,  but  also  a 
means  of  destroying  the  bonds  that  held  the  Union  together. 
But  their  efforts  were  in  vain.  Congress  enacted  the  ''Tariff 
of  Abominations"  law,  which  bore  the  highest  rates  of  any 
tariff  prior  to  the  Civil  War ;  and  which,  strange  to  say,  satis- 
fied nobody,  not  even  protected  manufacturers,  since  they  now 
found  it  necessary  to  pay  tariff  duties  on  many  of  the  raw 
materials  which  they  were  compelled  to  use  in  their  business. 
The  South  was  in  a  ferment  over  the  tariff  question.  South 
Carolina  took  advanced  ground  by  threatening  to  oppose 
within  her  boundaries  the  enforcement  of  the  tariff  law.  Fear- 
ful of  the  outcome  of  such  an  action.  Congress  in  1832  modified 
somewhat  the  law  of  1828,  but  not  enough  to  satisfy  South 
Carolina. 


258  ELEMENTARY   ECONOMICS 

Decline  of  the  tariff  rate.  —  The  situation  now  grew  worse 
instead  of  better.  South  CaroUna  declared  the  tariff  law  of 
1832  to  be  null  in  so  far  as  its  operation  in  that  state  was  con- 
cerned. President  Jackson,  who  was  determined  to  enforce 
the  law  as  long  as  it  remained  on  the  statute  books,  secured 
from  Congress  authority  to  compel  the  obedience  of  the  nullify- 
ing state.  Both  sides  prepared  for  the  struggle,  which  seemed 
inevitable.  Just  then  Clay,  whom  everybody  regarded  as  the 
"  father  "  of  the  protective  principle,  came  forward  with  a  com- 
promise measure  in  which  he  sacrificed  temporarily  for  the  sake 
of  peace  the  essential  features  of  protection.  The  result  was  the 
Compromise  Tariff  of  1833,  which  provided  that  all  the  rates  in 
the  Act  of  1832  above  20  per  cent  should  be  gradually  reduced 
to  that  level,  the  final  reduction  to  be  made  on  July  1,  1842. 

Consequently,  there  was  no  general  tariff  legislation  dilring 
the  next  eight  years.  In  1841,  however,  the  Whigs  came  into 
power  pledged  to  raise  the  tariff  rates  as  soon  as  the  compromise 
had  run  its  course.  Accordingly,  with  the  guidance  of  Clay,  a 
Whig  Congress  passed  a  protectionist  measure,  which  President 
Tyler  forthwith  vetoed.  Later  (1842)  he  agreed  to  a  bill 
similar  in  character,  which  is  known  in  the  history  of  the  United 
States  as  the  Whig  Tariff  of  1842.  Three  years  later  the 
Democrats,  on  return  to  power,  set  about  to  revise  the  tariff 
rates  downward.  Careful  investigations  of  business  conditions 
were  made  by  Robert  J.  Walker,  secretary  of  the  treasury. 
With  the  information  secured  by  Secretary  Walker  as  a  basis, 
Congress  enacted  the  Walker  Tariff  Act  of  1846.  This  act  was 
free  trade  in  character ;  it  arranged  the  articles  taxed  under 
schedules  designated  as  A,  B,  C,  and  so  on;  and  it  carried  a 
large  free  list  —  that  is,  imports  not  taxed.  With  slight  modifi- 
cations this  act  continued  in  force  until  1861,  when  it  was  super- 
seded by  the  Morrill  Act,  which  bore  higher  rates  made  neces- 
sary by  a  treasury  deficit. 


THE   TARIFF   IN   THE   UNITED   STATES  259 

The  war  tariffs.  —  The  heavy  expenses  of  the  Civil  War 
prompted  Congress  in  1862  and  again  in  1864  to  raise  tariff  rates 
to  a  point  higher  than  they  had  ever  been  before.  Compared 
with  the  Morrill  Tariff,  the  war  tariffs  increased,  among  others, 
rates  on  pig  iron  and  iron  rods  fifty  per  cent,  on  silks  sixty  per 
cent,  on  raw  wool  one  hundred  per  cent,  and  on  certain  woolen 
goods  oije  hundred  per  cent.  Soon  after  the  close  of  the  war, 
the  opponents  of  protection  urged  on  Congress  the  necessity 
of  making  material  reductions  in  the  war-tariff  rates.  Their 
success  was  slight,  for  a  majority  of  the  people  believed  in  the 
merits  of  protection.  Finally  in  1887  President  Cleveland  de- 
voted his  entire  annual  message  to  the  necessity  of  lowering 
tariff  duties.  This  was  the  signal  for  a  congressional  battle. 
The  Republican  members  stood  solidly  for  protection;  the 
Democratic  members,  for  a  tariff  for  revenue  only.  The  de- 
bate that  followed  (in  1888)  was  a  battle  of  giants.  No  direct 
legislation  resulted,  though  it  served,  as  nothing  else  could 
have  done,  to  bring  the  subject  of  protection  into  the  political 
foreground. 

A  period  of  high  tariff  rates.  —  Two  years  later  (1890) 
the  Republicans,  being  in  power  both  in  Congress  and  in  the 
White  House,  enacted  the  McKinley  Tariff  Law,  which  placed 
the  rates  on  many  imports  even  higher  than  the  war  tariffs  had 
done.  Apparently  the  people  were  not  prepared  for  such  a 
radical  measure.  The  election  of  1890  gave  the  Democrats 
control  of  the  lower  house  of  Congress,  Mr.  McKinley  even 
failing  of  election  in  a  district  supposed  to  be  protectionist. 
Two  years  later  (1892)  the  Democrats  captured  the  presidency 
as  well  as  Congress.  They  then  set  about  to  enact  a  tariff  law 
along  the  lines  they  had  been  advocating  for  a  half  century. 
The  result  was  the  Wilson  Tariff  Act,  which  in  many  respects 
resembled  the  old  "  Abominations "  act  of  1828.  It  pleased 
nobody,  for  it  was  merely  a  bundle  of  inconsistencies,  made  so 


260  ELEMENTARY   ECONOMICS 

by  the  desire  of  many  members  of  Congress  to  secure  protection 
for  the  goods  produced  in  their  respective  districts  and  free 
trade  for  the  goods  consumed  there.  Even  President  Cleveland 
refused  to  sign  the  bill,  permitting  it  to'  become  a  law  without 
his  signature. 

Circumstances  combined  to  make  the  Wilson  Tariff  unpopular. 
The  people  believed  that  it  was  largely  responsible  for  the  Panic 
of  1893,  and  two  years  later  they  elected  Mr.  McKinley  and  a 
Republican  Congress  pledged  to  revise  the  tariff  rates  upward. 
Accordingly  in  1897  the  Dingley  Tariff  Law  was  enacted  with 
even  higher  rates  than  those  in  the  McKinley  Act.  The  pros- 
perity that  followed,  a  majority  of  the  people  attributed  for  a 
time  to  the  Dingley  Act.  \  By  1908,  however,  the  rank  and  file 
of  the  protectionists  had  misgivings  as  to  the  influence  of  such 
high  rates  on  industry.  They  began  to  suspect  that  the  tariff 
was  largely  responsible  for  the  high  prices,  which  were  coming 
to  be  burdensome.  Sensing  this  feeling,  the  Republican  plat- 
form of  that  year  declared  for  a  revision  of  tariff  rates.  Being 
successful  they  set  about  to  carry  out  their  promises.  The 
result  was  the  Payne-Aldrich  Tariff  Law  of  1909,  which,  while 
it  reduced  many  rates,  did  not  prove  satisfactory  to  those  who 
had  a  sincere  desire  to  see  the  tariff  materially  modified. 

A  return  to  lower  rates.  —  The  Payne-Aldrich  Law  served 
to  widen  a  split  which  was  already  making  itself  felt  in  the 
Republican  party.  The  more  progressive  leaders  of  the  party 
felt  that  it  was  not  living  up  to  its  best  traditions  as  a  friend 
of  the  masses.  Gradually  the  breach  widened,  until  those  who 
desired  to  work  reform  within  the  party  came  to  be  known  as 
insurgents.  By  the  spring  of  1912  the  feeling  had  become  bitter. 
President  Taft  was  supported  for  reelection  by  the  con- 
servatives of  the  party,  while  the  more  liberal  elements  favored 
ex-President  Roosevelt.  Both  men  were  finally  nominated, 
one  by  the  Republicans,  the  other  by  the  Progressives.     Divi- 


THE   TARIFF   IN   THE   UNITED   STATES  261 

sion  meant  defeat.  The  Democrats  elected  Woodrow  Wilson, 
their  candidate  for  president,  and  likewise  a  Democratic 
Congress. 

Once  again  in  control  of  the  government,  the  Democrats 
began  to  lay  plans  to  revise  the  tariff.  Congress  spent  months 
in  examining  witnesses,  and  in  discussing  the  advantages  and 
disadvantages  of  each  rate.  Finally  in  1914  the  Underwood- 
Simmons  Tariff  Law  was  sent  to  the  president  for  his  signature. 
This  act,  as  might  be  expected,  lowered  many  rates,  and  en- 
larged the  free  list.  To  offset  any  decrease  in  revenue  that 
might  arise  from  these  changes,  an  income  tax,  conformable  to  a 
recently  ratified  amendment  to  the  Constitution,  was  imposed. 

Basis  of  tariff  legislation.  —  Practically  every  one  of  our 
tariff  laws  has  been  the  result  of  compromise.  Protection 
cannot  escape  being  sectional,  or  even  local,  in  any  country ; 
and  in  a  government  like  ours,  where  each  lawmaker  represents 
the  interests  of  a  single  district,  localism  is  an  exceedingly  strong 
force.  Each  lawmaker  very  naturally  feels  the  necessity  of 
conserving  the  interests  of  his  own  constituents.  Accordingly, 
he  is  strongly  tempted  to  vote  for  an  entire  tariff  law  which 
favors  his  district,  even  though  he  be  decidedly  opposed  to 
nine-tenths  of  its  provisions.  The  legislative  history  of  any 
important  tariff  law  bears  out  this  statement.  It  has  fre- 
quently occurred  that  a  bill  passing  one  House  has  been  sub- 
jected to  hundreds  of  amendments  in  the  other. 

It  is  but  fair  to  say  that  Congress  has  made  some  attempts 
to  get  at  all  the  facts  in  the  case  of  protection.  In  1882  that 
body  provided  for  a  Tariff  Commission  and  granted  it  power  to 
examine  witnesses  for  and  against  the  protective  policy.  The 
people  placed  little  confidence  in  the  good  intentions  of  the 
Commission,  since,  unfortunately,  its  chairman  happened  to  be 
interested  in  the  wool  industry.  Again,  in  1909  a  second  com- 
mission, called  a  Tariff  Board,  was  authorized.     This  Board 


k 


262  ELEMENTARY   ECONOMICS 

survived  but  a  few  years.  In  1914  Congress  provided  for  a 
third  commission,  which,  on  account  of  the  high  personnel  of  its 
membership,  is  Ukely  to  have  the  moral  support  of  the  people. 
It  must  be  kept  in  mind,  however,  since  Congress  cannot 
delegate  its  legislative  powers,  that  the  best  any  tariff  board 
or  commission  can  hope  to  do  is  to  arrive  at  some  definite  con- 
clusion fortified  by  imanswerable  facts  that  will  appeal  to  the 
good  sense  of  Congress  and  the  people. 

59.   Basis  of  Free  Trade 

Advantages  of  territorial  division  of  labor.  —  The  chief 
argument  for  free  trade  —  and  some  are  bold  enough  to  insist 
that  it  is  the  only  one  needed  to  prove  the  case  —  is  based  on  the 
advantages  arising  from  territorial  division  of  labor.  We  have 
seen  how  industry  naturally  adapts  itself  to  locality :  cotton- 
growing  to  ~  the  Southern  states,  wheat-growing  to  the  upper 
Mississippi  Valley,  and  iron-smelting  to  Pennsylvania.  We 
have  seen  also  how,  as  a  result  of  this  adaptability,  the  world's 
supply  of  goods  is  greatly  increased  over  what  it  would  be  if  each 
locality  or  section  were  self-sufficing.  With  this  fact  established, 
the  advocate  of  free  trade  raises  the  question :  What  possible 
benefit  to  the  Society  of  such  a  country  as  ours  can  come  from 
setting  up  artificial  barriers  that  prevent  consumers  from  getting 
their  goods  where  they  can  be  most  advantageously  produced? 
They  ask  just  how  much  better  off  industrially  would  New  Eng- 
land be  at  the  present  time  if  every  pound  of  cotton  which  has 
gone  into  that  section  had  paid  an  import  tax.  The  most 
enthusiastic  supporter  of  protection  realizes  the  advantages 
gained  from  interregional  trade  within  the  United  States.  He 
knows  that  one  of  the  sources  of  wealth  of  Pennsylvania  is  the 
rich  grainfields  of  Iowa  and  Illinois;  and  that  a  tariff  wall 
that  would  compel  each  bushel  of  wheat  or  corn  to  pay  an 
import  tax  would  work  a  positive  hardship  on  the  consumers  of 


THE   TARIFF   IN   THE   UNITED.  STATES  263 

Pennsylvania  without  benefiting  the  producers  of  Iowa  or 
Illinois.  The  free  trader  at  this  point  extends  his  argument 
by  insisting,  for  example,  that  the  people  of  the  United  States, 
wheat  farmers  included,  would  profit  in  the  long  run  if  they 
could  secure  wheat  from  Argentina  cheaper  than  they  could 
produce  it  at  home. 

No  buying  without  selling.  —  The  free  trade  advocate  next 
takes  safe  ground  by  declaring  that  there  can  be  no  buying 
without  selling  —  that  is,  no  importing  without  exporting. 
He  points  out  that  our  purchases  abroad  in  cheap  markets  must 
be  paid  for  in  goods  of  our  own  production ;  and  that  the  cheaper 
they  are  the  less  of  our  goods  it  will  be  necessary  to  send  abroad 
to  exchange  for  them.  Finally,  by  selecting  an  extreme  illustra- 
tion, he  shows  the  absurdity  of  the  protectionist  doctrine  of  self- 
sufficiency.  He  asks  if  it  would  be  profitable  to  grow  bananas 
in  Maine,  corn  in  Rhode  Island,  cotton  in  New  York,  or  sugar 
cane  in  Pennsylvania.  Of  course  the  answer  is  "  No."  He  then 
completes  the  argument,  as  far  as  he  is  concerned,  by  asking  why 
the  natural  adaptability  of  industry  should  be  hindered  at  all. 

60.  Economic  Arguments  for  Protection 

The  infant-industry  argument.  —  The  soundest  argument 
for  protection  is  known  as  the  infant-industry  argument,  which 
means  simply  that  a  society  is  justified  in  burdening  itself  to 
protect  new  industries  temporarily  against  the  competition  of 
similar  foreign  industries,  already  full-grown  and  strong. 
Alexander  Hamilton  clearly  saw  this  need  and  urged  on  Congress 
in  his  Report  on  Manufactures  (1791)  the  necessity  of  en- 
couraging those  struggling  industries  which  gave  promise  of 
future  development.  The  practical  difficulty  which  the  carry- 
ing out  of  this  policy  has  met  has  been  the  disinclination  on  the 
part  of  the  protected  infant  to  see  when  he  has  really  reached  his 
manhood  stage. 


264  ELEMENTARY   ECONOMICS 

The  home-market  argument.  —  Second  in  point  of  time  is 
the  home-market  argument,  which  Hamilton  outlined  in  his 
Report  on  Manufactures,  and  which  Henry  Clay  enlarged  and 
extended  during  the  tariff  debate  of  1824.  The  essence  of  this 
argument  is  that  a  very  large  country,  like  the  United  States, 
should  artificially  encourage  one  industry  in  order  to  provide  a 
market  for  the  products  of  another.  Clay  contended  that  the 
United  States  could  amply  afford  to  burden  itself  with  the 
relatively  high  prices  of  New  England  manufactures,  if  by  so 
doing  a  market  was  provided  in  New  England  for  the  grain  of 
the  Mississippi  Valley  and  the  cotton  of  the  lower  South. 

The  wages  argument.  —  The  most  potent  argument  for  pro-^ 
tection  at  the  present  time  is  the  wages  argument,  which 
assumes  that  protection  causes  higher  wages  than  would  other- 
wise be  the  case.  Its  exponents  hold  that  protection  accounts 
for  American  workers  getting  higher  wages  than  foreign  workers 
engaged  in  the  same  trade  or  industry.  They  usually  fail, 
however,  to  explain  by  similar  reasoning  why  wages  are  higher 
in  free-trade  England  than  in  protected  Germany.  It  must  be 
remembered  too  that  at  no  time  under  the  highest  tariff  rates 
was  more  than  one-tenth  of  the  workers  of  the  country  engaged 
in  protected  industries. 

61.  Protection  and  Nationalism 

The  spirit  of  nationalism.  —  Protection  is  essentially  nation- 
alistic. Its  ideal  is  a  nation  industrially  strong  and  self-suffi- 
cient to  a  high  degree.  Any  force  that  increases  the  spirit  of 
nationalism  increases  also  the  desire  for  additional  industrial 
strength.  Illustrations  from  the  history  of  our  country  are 
illuminating.  Every  foreign  war,  except  the  one  with  Mexico, 
has  been  the  direct  cause  of  an  increase  in  tariff  rates  or  of  a 
maintenance  of  rates  already  high.  The  cause  is  not  far  to  seek. 
War  necessarily  increases  the  dependence  of  a  country  on  itsDwn 


THE   TARIFF   IN   THE   UNITED   STATES  265 

industries.  Besides,  it  knits  the  various  sections  into  a  closer 
union.  Hence,  there  arises  a  general  desire  not  only  to  main- 
tain the  increased  self-sufficiency  reached  during  the  stress  of 
war,  but  also  to  protect  those  industries  which  the  war  itself  has 
brought  into  being. 

Military  self-sufficiency.  —  Many  of  the  most  ardent  friends 
of  protection  agree  that  it  has  little  economic  justification,  and 
that  it  imposes  a  heavy  financial  burden  on  any  society  which 
adopts  its  principles  and  practices.  They  insist,  however,  and 
with  justice,  that  the  financial  cost  of  protection  does  not 
differ  in  principle  from  the  cost  of  a  battleship.  Each  in  its 
own  way,  -they  say,  plays  an  important  role  in  defending  the 
country  from  her  enemies.  The  Great  War  brought  the  truth  of 
this  argument  home  to  the  whole  world.  The  interruption  of 
our  trade  with  the  Central  Powers  threatened  for  a  time  to 
cripple  some  of  the  important  industries  that  depended  on  Ger- 
man products,  such  as  chemicals  and  dyes.  Fortunately,  after 
expensive  experiments  and  long  delays,  we  succeeded  in  making 
good  our  loss  in  these  lines.  But  it  is  doubtful  if,  in  the  long 
run,  we  gained  by  not  having  previously  encouraged  these  same 
manufactures  by  protecting  them  against  German  competition. 
As  one  \^rriter  has  put  it :  What  does  it  profit  a  poorly  clad  and 
poorly  equipped  soldier  to  know  that  for  generations  his  an- 
cestors have  gained  financially  by  purchasing  their  woolen 
cloth  and  equipment  from  the  present  enemy  simply  because 
they  could  not  make  them  so  cheaply  at  homie  ? 

EXERCISES  AND   PROBLEMS 
A 

1.  What  is  the  difference  between  a  protective  tariff  and  a  tariff 
for  revenue  only  ? 

2.  Why  were  the  first  tariffs  not  protective  ? 

3.  Why  was  the  South  generally  opposed  to  protection? 


266  ELEMENTARY   ECONOMICS 

4.  Why  was  New  England  divided  over  the  tariff  about  1820? 

5.  Why  was  the  tariff  of  1828  called  the  "tariff  of  abominations" ? 

6.  Why  are  schedules  used  in  tariff  acts? 

7.  Why  were  tariff  rates  not  lowered  at  the  close  of  the  Civil 
War? 

8.  Account  for  the  various  changes  in  the  tariff  between  1890  and 
1909. 

9.  Why  is  the  tariff  likely  to  be  a  local  issue  ? 

10.  What  benefits  could  possibly  accrue  to  the  people  of  Iowa  by 
placing,  if  it  were  constitutional,  a  tariff  duty  on  Pennsylvania  iron? 
on  Massachusetts  cotton  goods  ? 

11.  Why  can  there  be  no  buying  abroad  without  selling  abroad? 

12.  What  is  the  essence  of  the  "infant  industry"  principle? 

13.  How  has  this  principle  been  abused? 

14.  What  is  the  relation  of  protection  and  nationalism?* 

B 

1.  Make  a  list  of  goods  you  know  to  be  of  foreign  manufacture. 

a.  Which  foreign  countries  are  represented  in  the  list? 

b.  What  is  the  nature  of  the  articles  in  the  list  ? 

i.  Are  they  heavy? 

ii.  What  raw  materials  have  gone  into  their  manufacture  ? 

c.  Why  have  they  been  imported  and  not  made  in  this  country? 

2.  Call  to  mind  the  most  successful  physician  in  your  community. 
a.    Suppose  that  he  is  also  a  mechanical  genius. 

i.  Does  he  keep  his  own  car  in  repair  ? 
ii.  Does  he  repair  his  surgical  instruments? 
h.  Suppose  that  he  is  also  the  strongest  man  physically  in  the 
community. 
i.  Does  he  make  it  a  practice  to  mow  his  own  lawn? 
ii.  Does  he  help  store  the  coal  in  his  basement  ? 

c.  Suppose  that  he  is  also  the  most  expert  typist  and  office 

,  worker  in  the  community. 
i.  Does  he  do  his  own  typing? 
ii.  Does  he  keep  his  own  books  and  answer  his  telephone? 

d.  Correct  answers  to  these  and  similar  questions  which  any  one 

of  us  can  raise,  wiU  aid  in  clearing  our  notions  of  protection. 

3.  Inquire  among  the  business  men  of  your  community  as  to  the 
attitude  of  each  toward  a  protective  tariff. 


THE   TARIFF   IN   THE   UNITED   STATES  267 

a.  Which  hold  to  views  held  by  their  fathers? 

b.  Which  are  interested  in  a  business  way  in  the  tariff  ? 

c.  Which  believe  strongly  in  nationalism?  in  internationalism? 

d.  How  many  have  changed  their  views  on  protection  since  they 

first  began  to  give  the  question  serious  thought  ? 

e.  Learn  why  these  views  have  been  changed. 

/.   Would  you  say,  after  making  this  inquiry,  that  the  average 
business  man  thinks  seriously  on  protection  and  its  effects  ? 
4.    Explain  why  your  own  community  or  congressional  district  is 
protectionist  or  free  trade. 


1.  During  the  first  half-century  of  our  history  many  individuals 
and  several  sections  of  the  country  changed  their  opinions  radically 
regarding  the  merits  of  protection. 

a.  Why  did  the  South  at  first  favor  protection? 

b.  Account  for  Clay's  zeal  in  supporting  protection. 

c.  Why  was  New  England  divided  over  the  question? 

d.  Would  you  expect  any  changes  of  opinion  to  have  occurred  in 

New  York,  Ohio,  or  Indiana?     Explain. 

2.  At  one  time  the  friends  of  protection  argued  that  the  high  wages 
of  American  workmen  made  high  tariff  rates  necessary  to  protect  the 
American  manufactures  that  gave  these  workmen  employment.  Now 
the  argument  is  that  the  tariff  itself  makes  the  wages  of  American  work- 
men high. 

a.  Examine  each  argument. 
6.  Is  either  sound  ?     Explain. 

c.  Are  they  inconsistent  ?     Why,  or  why  not  ? 

d.  What,  in   your  opinion,  is   the   relation  of   protection   and 


wages 


3.   Examine  the  statement  that  "the  tariff  is  a  local  issue." 

a.  Which  sections  of  the  country  invariably  support  or  oppose 

protection  ? 

b.  Can  you  think  of  any  inducement  that  might  cause  free-trade 

senators  to  vote  for  protection?     Explain. 

c.  How  would  you  expect  your  congressman  to  vote  on  pro- 

tection?    Why? 

d.  Which  is  likely  to  be  the  stronger  force,  his  own  judgment  or 

the  interests  of  his  district? 


268  ELEMENTARY   ECONOMICS 

4.  "Every  purchase  of  foreign-made  goods  diminishes  the  demand 
for  American  labor." 

a.  What  is  the  basis  of  this  statement  ? 

6.  What,  in  the  long  run,  is  used  to  pay  for  foreign-made  goods  ? 

c.   Formulate  your  own  opinion  as  to  its  correctness. 

5.  What  lessons  on  protection  did  the  Great  War  teach  the  United 
States. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  387-410. 

Ely,  Principles  of  Economics,  3d  ed.,  pages  368-383. 

Fetter,  Economics,  Vol.  II,  pages  199-240. 

Fisher,  Elementary  Principles  of  Economics,  pages  194,  195,  207,  208, 

337,  453,  454. 
Johnson,  Introduction  to  Economics,  pages  350-373. 
Seager,  Principles  of  Economics,  pages  383-398. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  597-612. 
Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  508-546. 


CHAPTER  XX 
FLUCTUATIONS    OF    THE    PRICE    LEVEL 

62.  Effects  of  Fluctuating  Prices 

Fluctuations  in  the  value  of  money.  —  The  general  notion  is 
that  money,  especially  gold,  possesses  a  constant  value.  Yet 
any  one  who  has  had  experience  in  making  purchases  over  a 
period  of  time,  realizes  that  a  gold  dollar  will,  in  general,  buy  less 
at  one  time  than  at  another.  His  conclusion  is  likely  to  be,  not 
that  the  value  of  the  dollar  has  changed,  but  rather  that  prices 
of  goods  have  changed.  In  general  these  two  changes  are  but 
opposite  aspects  of  the  same  economic  phenomenon.  A  rise  in 
prices  means  a  fall  in  the  value  of  money,  while  a  fall  m  prices 
indicates  that  the  purchasing  power  of  the  dollar  has  risen.  If 
all  exchanges  were  made  by  barter  there  could  be  no  change  in 
the  general  price  level  —  that  is,  the  value  of  all  goods  could  not 
rise  or  fall.  If  some  fell  others  would  rise,  while  if  some  rose 
others  would  fall.  To  get  a  simple  illustration,  let  us  suppose 
that  a  bushel  of  wheat  will  exchange  for  two  bushels  of  corn,  or 
for  ten  pounds  of  meat  or  for  twenty  oranges;  and,  further, 
that  there  are  no  other  goods  under  consideration.  Let  us 
suppose  further  that  a  short  wheat  crop  causes  the  value  of 
wheat  to  rise  until  a  bushel  will  exchange  for  three  bushels  of 
com,  or  fifteen  pounds  of  meat,  or  thirty  oranges.  Truly  the 
value  of  wheat  has  risen,  but  what  of  the  value  of  each  of  the 
other  goods  in  respect  to  wheat  or  to  each  other?  Clearly  com 
has  fallen  in  value  if  we  compare  it  with  wheat ;  it  has  not 
changed  in  value,  if  measured  in  terms  of  oranges.    Thus,  if  corn 

269 


270  ELEMENTARY   ECONOMICS 

Fluctuations  in  Price  Level:  1890-1918. 


260 


200 


FLUCTUATIONS   OF   THE   PRICE    LEVEL  271 

were  the  medium  of  exchange  we  would  say  that  wheat  has  risen 
in  price  and  that  the  price  of  meat  and  oranges  has  remained 
the  same.  If,  on  the  other  hand,  wheat  were  the  medium  of 
exchange,  the  fact  that  a  unit  of  wheat  exchanges  for  more  corn, 
meat,  or  oranges  would  indicate  a  general  fall  in  price  level. 
Since  money  is  the  medium  by  which  all  other  values  are  meas- 
ured, its  value  rises  and  falls  inversely  with  the  rise  and  fall 
of  the  price  level. 

Effects  on  individuals.  —  Appreciable  variations  in  price 
level  are  soon  noticed  by  individuals,  in  a  variety  of  ways, 
especially  by  those  whose  incomes  are  constant.  A  rise  in 
prices  has  exactly  the  same  effect  as  a  decrease  in  income,  and 
conversely  a  fall  of  the  price  level  is  actually  an  increase  of  the 
income.  There  is,  to  be  sure,  in  most  cases  a  tendency  for  the 
income  to  follow  price  level ;  yet  salaries  and  wages  almost 
always  lag  behind  a  rise  in  prices,  while  they  respond  more 
quickly  to  a  fall.  Price  fluctuations  are  largely  responsible  for 
social  unrest.  When  one  has  adjusted  his  income  to  his  expendi- 
tures, any  change,  especially  an  upward  tendency  in  prices,  is 
not  welcome.  The  most  striking  effect  is  felt  by  those  who 
depend  entirely  on  funded  incomes.  Thus,  a  widow  receiving  a 
life  insurance  annuity  of  $600  a  year  is  bound  to  feel  the  pinch 
of  an  increase  in  the  price  level.  She  finds  it  necessary  to  curtail 
portions  of  her  accustomed  expenditures.  Her  command  over 
goods  in  1918,  for  example,  was  scarcely  more  than  half  as 
great  as  it  had  been  twenty  years  before.  In  reaUty,  then,  her 
income  had  shrunk  from  $600  to  $300. 

Effects  on  the  government.  —  A  rise  in  prices  quickly  affects 
governments  —  national,  state,  city.  All  of  the  states,  for 
example,  expend  large  sums  annually  on  charitable  institutions, 
the  amount  of  which  is  usually  determined  at  stated  intervals. 
If  after  the  size  of  an  appropriation  is  fixed,  the  prices  of  food- 
stuffs, or  fuel,  or  clothing  rise,  the  appropriation  is  bound  to 


272  ELEMENTARY   ECONOMICS 

prove  inadequate  to  meet  the  needs  for  which  it  was  made. 
Salaries,  too,  must  be  adjusted  to  meet  the  increased  cost  of 
living.  Even  stationery,  printing,  and  office  supplies  cost  more 
than  formerly.  Here  is  a  partial  explanation  for  the  rapid 
increase  in  taxation  following  the  year  of  1900.  The  effects  of 
higher  prices  on  government  show  themselves  quickly  under  the 
stress  of  war.  The  national  government  borrows  huge  sums. 
Prices  rise  as  a  result  of  war  demands.  Usually,  additional  funds 
are  necessary  to  cover  unanticipated  rises  in  prices.  Thus  the 
problems  of  war  have  added  to  them  the  problem  of  securing 
funds  to  cover  inflated  prices. 

63.   Measurement  of  Price  Fluctuations 

Payment  of  long-time  debts.  —  In  the  preceding  discussion 
we  have  confined  our  attention  to  short-time  transactions  in 
which  the  effects  of  price  fluctuation  may  be  difficult  to  see. 
Let  us  now  turn,  merely  for  illustrative  purposes,  to  its  effects 
on  long-time  transactions.  Suppose  one  man  loaned  another 
in  1900  the  sum  of  -$1000  payable  in  eighteen  years.  When  the 
loan  was  made,  the  $1000  possessed  a  certain  purchasing  power, 
which  may  be  designated  by  4  x.  Gradually,  as  is  well  known, 
the  general  price  level  rose,  until  in  1918  it  was  about  twice  as 
high  as  it  had  been  eighteen  years  previously.  When  the  loan  is 
repaid  the  lender  finds  that  its  purchasing  power  has  been 
decreased  by  half,  to  2  x.  In  other  words,  he  cannot  derive  from 
it  the  same  satisfaction  which  he  could  have  derived  when  he 
loaned  it.  He  finds  that  it  requires  more  money  to  buy  the 
same  amounts  of  food,  of  clothing,  and  of  other  goods.  The 
significance  of  this  loss  of  purchasing  power  appears  strikingly 
in  the  case  of  a  savings-bank  deposit,  which  bears  a  low  rate  of 
interest.  Let  us  assume  that  such  a  deposit  was  made  in  1905, 
remaining  ten  years  and  earning  three  per  cent  interest  com- 
pounded annually.     One  hundred  dollars  deposited  under  these 


FLUCTUATIONS   OF   THE   PRICE    LEVEL  273 

circumstances  equaled  $134.39  in  1915.  Yet  the  rise  in  prices 
during  that  period  more  than  offset  the  interest  earnings.  In 
short,  the  depositor,  as  far  as  the  gratification  of  desires  was 
concerned,  was  in  a  poorer  situation  when  he  withdrew  his 
deposit  than  he  had  been  when  he  made  it.  Depreciation  in 
the  value  of  money  (rise  of  the  price  level)  works  a  similar  hard- 
ship on  debtors.  Thus,  a  dollar  which  is  repaid  after  a  period 
of  falling  prices  has  a  much  greater  command  over  commodities 
than  it  had  at  the  time  the  loan  was  made. 

Principle  of  index  numbers.  —  For  measuring  these  changes 
in  general  prices  a  convenient  device  known  as  index  numbers  is 
employed  by  the  government  and  others.  The  prices  for  any 
year  may  be  taken  as  a  standard  by  which  the  prices  of  any  other 
year  may  be  measured.  For  purposes  of  illustration,  we  may 
take  1902  as  the  standard  year  and  by  it  measure  the  price 
level  of  1912,  as  follows : 


1902  1912 

$  1.00  — 100%  — Wheat  (bu.)     .     .     .      $0.80—80% 
15.00  —  100%  —  Iron  (ton)    . 
0.12  —  100%  —  Cotton  (lb.) 
7.00  —  100%  —  Cattle  (cwt.) 
0.30  —  100%?  —  Wool  (lb.)    . 
6.00  —  100%,  —  Hogs  (cwt.) 


18.00—120%, 
0.13  —  108%, 
6.00—  86% 
0.40—133% 
6.00—100% 


6)600%  6)627% 

100%  105% 

Thus,  by  considering  only  the  six  commodities  named,  we  find 
that  the  price  level  of  1912  is  five  per  cent  higher  than  it  had 
been  in  1902.  It  will  be  noticed,  however,  that  during  this 
period  the  price  of  hogs  remained  unchanged,  and  that  the 
prices  of  wheat  and  cattle  fell.  If  the  consumption  of  an  in- 
dividual were  confined  to  these  three  commodities,  he  would, 
during  the  ten  years  under  consideration,  have  enjoyed  a  falling 
price.  Yet  the  typical  consumer,  since  he  is  likely  to  purchase 
a  great  many  different  commodities,  would  have  foimd  at  the 


274  ELEMENTARY   ECONOMICS 

latter  date  that  the  purchasing  power  of  his  money  had  actually 
declined,  compared  to  its  purchasing  power  in  1902. 

Applications  to  industry.  —  The  principle  of  index  numbers 
is  applied  in  a  variety  of  ways  to  the  adjustment  of  industrial 
problems  arising  from  price  fluctuations,  though  it  is  not  yet 
generally  accepted  by  business  men  as  a  practical  solution.  The 
government  from  time  to  time  publishes  the  fluctuations  in 
prices  as  shown  by  ndex  numbers,  and  very  often,  as  in  the 
case  of  fixing  wages,  employs  it  to  adjust  unfair  conditions.  It 
has  been  seriously  proposed  by  some  that  the  national  govern- 
ment undertake,  by  changing  the  size  of  the  gold  dollar,  to  keep 
prices  at  exactly  the  same  level.  So  far  the  proposal  has 
appeared  to  officials  and  business  men  as  impracticable,  though 
none  denies  the  need  of  some  plan  whereby  incomes  might  be 
protected  against  price  fluctuation. 

64.   Price  Level  and  Industry 

Different  phases  of  industry.  —  The  accepted  explanations 
of  what  economists  call  cycles  of  business  are  too  involved  for 
detailed  discussion  at  this  point  in  our  progress.  We  can, 
however,  notice  with  profit  the  three  phases  through  which 
industry  seems  to  move  in  its  never-ending  journey.  For  the 
sake  of  convenience  we  shall  begin  our  examination  at  the  point 
where  prices  start  to  rise,  giving  attention  first  to  the  period  of 
prosperity ;  then  to  the  period  of  malproduction,  usually  called 
overproduction ;  and  finally  to  the  period  of  depression,  which 
brings  us  back  to  the  starting  point. 

Period  of  prosperity.  —  Rising  prices  and  industrial  pros- 
perity are  intimately  related.  Just  as  soon  as  prices  begin  to 
rise  producers  begin  to  enjoy  increased  profits,  which  in  turn 
stimulate  them  to  increase  the  volume  of  their  output.  They 
buy  more  land,  build  -additions  to  their  plants,  purchase  newer 
and  better  equipment,  and  increase  their  laboring  forces.     They 


FLUCTUATIONS    OF    THE    PRICE    LEVEL  275 

reach  out  after  new  markets,  either  by  increasing  their  sales 
force  or  by  advertising  more  Hberally.  Prosperity  is  in  the  air. 
Every  undertaking  seems  to  succeed.  Raw  materials  increase 
in  value,  permitting  higher  prices  to  be  set  on  finished  products 
even  before  they  are  ready  for  the  markets.  Jobbers  and  mer- 
chants reap  additional  profits  which  arise  from  the  increases  in 
value  their  goods  have  enjoyed  while  waiting  to  be  sold.  It  is 
to  be  noticed  that  the  enterpriser  first  of  all  feels  the  impulse 
coming  from  a  rising  price  level.  This  impulse  he  transmits 
to  others  by  competing  sharply  for  raw  materials,  land,  labor, 
and  capital,  which  he  must  have  in  order  to  gain  increased 
profits  through  an  increase  in  production;  also  by  increasing 
his  own  purchases  for  consumption. 

This  whole  movement  is  extremely  complicated,  yet  we  may 
assume  a  simple  case  for  purposes  of  illustration.  Five  manu- 
facturers of  a  standard  article  enjoy,  let  us  say,  a  monopoly  of  its 
production.  Just  as  soon  as  the  price  level  starts  upward  they 
begin  to  enjoy  additional  profits  arising  from  the  increased  price 
which  their  products  coromand.  Each  sees  the  desirability  of 
increasing  his  own  output.  It  is  highly  probable  that  up  to  this 
point  their  laborers  have  not  enjoyed  any  of  the  income  which 
the  increased  price  produces;  and  it  is  also  possible  that  the 
producers  of  the  raw  materials  which  our  five  manufacturers  con- 
sume are  selling  at  the  old  price.  The  competition  of  the  five, 
however,  will  in  time  raise  wages,  and  increase  the  prices  of  raw 
materials.  ^ 

Malpr eduction  and  credit  expansion.  — The  struggle  for  extra 
profits  overreaches  itself  in  due  time.  Producers  overestimate 
the  capacity  of  the  market  for  consumption  at  a  price  that  will 
return  costs  of  production.  Here  is  the  key  to  the  mooted 
question :  Is  overproduction  possible  ?  The  answer  may  be 
Yes  or  No.  In  either  case  an  explanation  is  necessary.  Over- 
production is  possible,  if,  by  overproduction,  we  mean  that  there 


276  ELEMENTARY   ECONOMICS 

is  a  surplus  of  goods  for  which  there  is  no  demand  at  a  price 
that  will  cover  the  expenses  involved  in  producing  them.  It  is 
not  possible  in  the  sense  that  there  are  more  goods  than  society- 
can  consume,  for  the  social  capacity  for  consumption  is  never 
satisfied.  What  actually  happens  is  that  too  many  goods  of  a 
particular  kind  are  thrown  on  the  market  —  that  is,  there  is 
malproduction. 

At  the  same  time  there  is  almost  sure  to  have  been  an  over- 
expansion  of  credit.  Producers  of  all  sorts  have  been  carried 
away  by  the  hope  of  anticipated  profits,  resulting  in  the  creation 
not  only  of  more  goods  than  society  demands,  but  also  in  the 
creation  of  excessive  money  obligations.  Such  a  situation 
usually  results  in  a  crisis.  Manufacturers  curtail  their  opera- 
tions by  lessening  their  purchases  of  raw  materials,  by  dis- 
charging portions  of  their  workmen,  and  by  contracting  their 
active  capital.  Producers  of  raw  materials,  laborers,  and 
money-lenders  must,  as  a  result,  curtail  their  expenditures  for 
consumable  goods.  All  is  uncertainty^  Business  optimism  has 
disappeared.  The  typical  business  man  waits  for  others  to  take 
the  lead.     Prices  are  now  on  the  decline. 

Period  of  falling  prices.  —  After  the  first  few  months  of  the 
crisis,  business  begins  to  readjust  itself  on  a  new  basis.  Con- 
servatism becomes  the  watchword.  Producers  exercise  great 
care  in  determining  the  markets.  They  give  more  attention  to 
details,  are  less  liberal  in  paying  wages,  and  drive  sharp  bar- 
gains for  raw  materials.  If  prices  continue  to  fall  for  a  time, 
as  is  usually  the  case,  readjustments  are  constantly  necessary. 
Obviously,  there  is  a  limit  below  which  prices  cannot  fall. 
Hence  the  time  must  come  when  the  trend  will  turn  upward. 
This  is  hastened  by  the  natural  optimism  of  business  men,  by 
the  infusion  of  new  blood  among  the  enterprisers,  and  by 
improvements  in  the  industrial  arts.  Here,  then,  we  are  back 
again  at  the  point  where  we  started. 


FLUCTUATIONS   OF   THE   PRICE   LEVEL  277 

Experiences  of  the  United  States  with  panics.  — .It  may 
happen,  as  our  own  experience  shows,  that  the  panic  comes  at 
the  close  of  a  fall  in  the  price  level  rather  than  at  its  beginning. 
In  1873  we  experienced  one  of  the  worst  panics  in  our  history. 
Yet  from  that  time  on  for  almost  twenty-five  years  prices 
continued  to  fall,  culminating  in  the  panic  of  1893.  For  three 
years  following  this  latter  panic  prices  kept  on  downward. 
Then  they  started  upward  imtil  by  1914  they  had  reached  such  a 
height  as  to  cause  grave  concern.  Many  far-sighted  men  pre- 
dicted a  severe  crisis.  Just  then  the  outbreak  of  the  Great 
War  created  a  heavy  demand  for  all  sorts  of  products.  The 
supply  of  money  increased.  Manufacturers  exerted  themselves 
to  reap  war  profits.  Practically  every  one  felt  the  prosperity 
that  came  from  the  war.  The  entry  of  the  United  States  itself 
in  the  war,  in  April,  1917,  gave  a  still  greater  impetus  to  pro- 
duction. The  heavy  demands  of  the  government,  coupled  with 
the  withdrawal  of  millions  of  men  from  industry,  pushed  prices 
still  higher,  which  no  doubt  a  return  to  normal  conditions  will 
lower. 

EXERCISES   AND   PROBLEMS 


1.  Why  cannot  the  value  of  all  commodities,  gold  included,  rise 
or  fall  at  the  same  time? 

2.  What  is  the  relation  between  the  price  level  and  the  value  of  an 
ounce  of  gold? 

•    3.    How  does  a  change  in  the  price  level  affect  individual  incomes  ? 
pubUc  incomes? 

4.  What  is  the  relation  of  changing  price  level  to  social  unrest  ? 

5.  Why  is  it  desirable  to  measure  fluctuations  in  price  level  ? 

6.  What  is  the  principle  underlying  the  use  of  index  numbers  ? 

7.  How  are  index  numbers  applied  to  business  affairs? 

8.  Just  how  does  the  shifting  of  the  price  level  affect  industry? 

9.  Why  should  a  crisis  usually  be  found  associated  with  high  prices  ? 

10.  What  is  meant  by  the  expression  "overproduction"? 

11.  What  has  been  the  experience  of  the  United  States  in  panics? 


278  ELEMENTARY   ECONOMICS 


B 

1.  Call  to  mind  some  experiences  of  your  own  in  which  the  price 
level  has  appeared  to  change. 

2.  Learn  from  inquiry  how  a  rise  of  the  price  level  has  affected  some 
stationary  income  such  as  a  pension  or  an  annuity. 

a.  Does   the  person  receiving  the  income  realize   that  it  has 

declined  in  purchasing  power? 
h.  If  so,  what  is  his  (or  her)  explanation  of  the  decline? 
i.  Is  it  based  on  changes  in  value  of  commodities? 
ii.  Is  it  based  on  changes  in  the  purchasing  power  of  money? 

c.  Which  of  the  two  explanations  appears  to  be  the  more  correct  ? 

d.  How,  if  at  all,  could  the  receiver  of  this  stationary  income 

protect  himself  (or  herself)  from  a  loss  in  its  purchasing 
power  ? 

e.  What  is  the  likelihood  that  changes  in  the  purchasing  power  of 

stationary  incomes  will  discourage  savings  and  investments  ? 

3.  Assume  prices  for  eleven  important  commodities  for  two  given 
years,  say  1914  and  1919. 

a.  Compare  the  price  level  for  the  two  periods. 

h.  How  would  the  change  in  price  level  have  affected  an  annuity 

of  $800? 
c.   How,  if  at  all,  would  you  expect  this  change  to  affect  wages 

in  general  ?  wages  of  any  particular  group  ? 
•     d.  How  should  wages  be  so  adjusted  as  to  place  the  wage-earner 

in  1919  on  the  same  income  level  he  had  occupied  in  1914? 
c.   What  change  should  be  made  in  the  weight  of  the  gold  dollar 

inorder  to  give  it  the  same  purchasing  power  in  1919? 


1.  If,  during  a  single  night,  the  general  price  level  should  double, 
what  would  be  the  immediate  effect  and  the  long-run  effect  on  the  income 
of  each  of  the  following : 

a.  Wheat-grower? 

h.  Owner  of  a  gold  mine? 

c.  Day  laborer  ? 

d.  Jewelry  manufacturer? 

e.  Civil  War  pensioner? 
/.    High  school  student? 


FLUCTUATIONS   OF   THE   PRICE   LEVEL  279 

2.  Since  the  fluctuations  of  the  price  level  tend  to  create  social 
unrest,  why  does  not  the  government  set  the  prices  of  all  commodities 
and  fix  labor  incomes  ? 

3.  Account  for  the  fact  that  wages  invariably  react  slowly  to  a  rising 
price  level. 

4.  Why  does  the  government  make  little  or  no  effort  to  prevent 
crises  ? 

5.  Discuss  the  practicability  of  changing  the  weight  of  the  gold 
dollar  to  correspond  with  changes  in  general  price  level. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  333-348. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  317-343. 

Fetter,  Economics,  Vol.  II,  pages  48-54. 

Fisher,  Elementary  Principles  of  Economics,  pages  144-164. 

Seager,  Principles  of  Economics,  pages  375-382. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  456-473. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  I,  pages  290-309. 


PART  V 
DISTRIBUTION  OF  THE  SOCIAL  INCOME 


CHAPTER  XXI 

DISTRIBUTION  OF  WEALTH  IN  THE  UNITED  STATES 

65.   Differences  in  Wealth  and  Income 

Meaning  of  distribution.  —  Distribution,  as  we  have  already 
seen,  means  the  sharing  of  the  products  of  industry  among  the 
factors  of  production  —  land,  labor,  and  capital.  The  shares 
that  go  to  these  factors  are  respectively,  rent,  wages,  and  in- 
terest. Usually  two  other  portions  are  set  aside.  One  is  the 
profits  of  the  enterpriser;  the  other,  the  taxes  of  the  govern- 
ment. Thus,  in  reality,  we  must  account  for  five  shares  in 
distribution;  and  in  doing  so  we  must  exercise  supreme  pre- 
caution, for  no  other  phase  of  our  economic  life  has  called  forth 
such  bitter  controversies  or  created  so  much  social  unrest. 

Distribution  and  free  land.  —  We  may  say,  with  reasonable 
assurance,  that  the  problem  of  distribution  is  a  modem  one.  At 
least  its  importance,  so  far  as  the  United  States  is  concerned,  is 
now  many  times  greater  than  it  was  a  century  or  even  a  half 
century  ago.  The  explanation  is  not  difficult.  It  is,  like  a 
great  many  other  explanations  of  American  developments, 
intimately  associated  with  the  opportunity  each  man  had  to 
settle  on  practically  free  land.  As  long  as  it  was  not  only 
possible,  but  also  fairly  easy  for  each  one  to  acquire  a  farm  for 
himself,  he  who  was  dissatisfied  with  his  share  in  distribution 
had  a  fair  opportunity  to  go  on  the  land  where  he  would  control 
all  of  the  shares.  Hence,  little  was  heard  of  the  poorly  paid 
laborer,  the  bloated  capitalist,  or  the  rich  landlord;  for  all 
labored,  almost  all  were  capitalists  in  the  sense  that  they  owned 

283 


284  ELEMENTARY   ECONOMICS 

their  tools,  and  all  had  a  fair  chance  to  get  land.  Laborers  in 
those  days  felt  little  or  no  need  of  organizing  to  secure  a  larger 
share  in  the  distribution  of  products.  They  saw  very  clearly 
in  most  cases  the  straight  road  that  led  from  the  employee  to 
the  employer  class.  Capitalists  as  such  were  few.  Hence,Uhe 
share  in  distribution  that  went  to  them  was  comparatively  \ 
small.  As  the  amount  of  free  public  land  became  less  and  less, 
the  importance  of  distribution  became  greater  and  greater. 
The  supply  of  free  land  not  only  declined,  but  also,  what  is  more 
important,  it  receded  westward,  making  itself  unavailable  to 
the  workers  and  capitalists  of  the  East.  First  the  worker  lost 
the  opportunity  to  escape  to  the  land,  and  next,  owing  to 
developments  in  production,  he  lost  control  of  his  tools.  Then 
he  began  to  lean  heavily  on  capital  for  support;  and  then 
capital  began  to  play  an  increasingly  important  part  in  pro- 
duction. Here  we  find  for  the  first  time  in  the  history  of  the 
United  States  sharp  lines  separating  the  factors  of  production, 
and  hence,  the  shares  in  distribution. 

Present-day  distribution.  —  Under  more  primitive  conditions 
the  typical,  individual  income,  as  we  have  just  seen,  was  made 
up  of  several  indistinct  parts.  For  his  labor  he  received  wages ; 
for  his  land,  rent ;  for  his  capital,  interest ;  and  for  his  business 
skill,  profits.  He  had,  at  the  best,  but  a  hazy  notion  of  the 
size  of  each  share.  The  same  situation  still  holds  in  agriculture. 
No  farmer  can  estimate  even  with  any  degree  of  accuracy  just 
what  portion  of  his  yearly  income  ought  to  be  attributed  to 
wages,  to  rent,  to  interest,  or  to  business  ability ;  and  no  one 
else  can  do  it  for  him ;  for  the  four  factors,  being  embodied  in 
one  person,  are  inseparable.  In  most  other  productive  lines 
no  such  difficulty  is  encountered.  There,  we  can  usually  deter- 
mine what  portion  of  the  product  each  factor  gets,  though  the 
problem  of  how  much  each  factor  ought  to  get  still  remains  un- 
solved.    There,  for  example,  the  wages  of  the  laborer  approxi- 


DISTRIBUTION  OF  WEALTH 


285 


mates  his  total  income.  His  returns  in  the  form  of  rent  or 
interest  are  likely  to  be  comparatively  small.  Likewise,  to  a 
less  degree,  the  income  of  the  landowner  (not  farmer)  is  rent ; 
of  the  capitalist,  interest ;   and  of  the  enterpriser,  profits. 

Here  w^e  have  the  cause  for  distribution  tending  to  become  a 
class  problem.  Each  group,  having  lost  an  interest  in  the 
shares  of  the  other  groups,  strives  to  increase  its  own  share  at 
their  expense.  The  result  is  mutual  misunderstanding.  Labor 
complains  of  the  greediness  of  capital,  while  capital  in  turn 
complains  of  labor's  unwarranted  demands.  Neither  appre- 
ciates the  part  the  landowner  plays,  while  all  three  resent  having 
to  pay  tribute  to  the  enterpriser,  whose  duty  it  is  to  bring  them 
together  for  productive  labor. 

Distribution  of  income  and  wealth.  —  We  may,  with  no  regard 
to  the  source  of  the  incotoe  of  each  class,  also  examine  the  dis- 
tribution of  incomes  and  wealth  among  classes.  Yet  it  would 
not  be  far  wrong  to  say  that  the  lower  income  groups  are  made 
up  almost  entirely  of  laborers,  while  the  higher  income  groups 
comprise,  for  the  most  part,  landowners,  capitalists,  and  enter- 
prisers, and  the  so-called  professional  people.  Professor  King 
estimates  incomes  among  American  families  as  follows : 


Annual  Income 

Percentage  op 

Families  Receiving 

Less  than  this 

Income 

Annual  Income 

Percentage  op 

Families  Receiving 

Less  than  this 

Income 

$200 

.07 

$1500 

90.31 

300 

1.04 

1800 

93.67 

400 

7.17 

2000 

94.86 

500 

16.70 

2400 

96.18 

700      . 

38.92 

3000 

97.42 

1000 

69.43 

3600 

98.10 

1200 

81.69 

4000 

98.39 

An  examination  of  this  estimate  —  for  it  can  be  nothing  more 
than  an  estimate  —  reveals  many  significant  facts.     First,  the 


286 


ELEMENTARY   ECONOMICS 


annual  income  of  more  than  two-thirds  of  the  families  is  less  than 
$1000  each,  while  less  than  one-tenth  of  the  families  each  enjoy 
an  income  of  $1500  or  more.  Second,  the  nmnber  of  families 
having  yearly  incomes  of  as  much  as  $3000  is  relatively  small 
(2.58%).  To  be  more  specific,  a  small  tradesman  or  a  skilled 
mechanic  with  an  annual  income  of  near  a  thousand  dollars, 
even  though  a  portion  of  it  be  derived  from  savings  or  land, 
belongs  to  the  upper  minority.  Also  higher-paid  railroad  em- 
ployees, such  as  train  conductors  and  locomotive  engineers, 
must  be  grouped  among  the  highest  one-twentieth. 

Another  carefully  prepared  estimate  (made  in  1918)  throws 
light  on  the  number  of  families  and  individvnls  in  each  income 
group.  Estimating  the  total  number  of  incomes  at  27,000,000 
and  the  aggregate  income  of  all  groups  at  $38,000,000,000,  the 
following  conclusions  were  reached  : 


Average  Income 

Number  of  Families 

Per  Cent  of 
Total  Income 

Per  Cent  of 
No.  OP  Incomes 

$         850  (or  less)    . 

7,275,000 

12.3 

26.9 

1,000    .     .     .     . 

3,500,000 

9.4 

12.9 

1,250    . 

2,250,000 

7.4 

8.3 

1,500    . 

1,600,000 

6.3 

5.9 

2,000    . 

385,000 

2.0 

1.4 

3,000    . 

167,000 

1.3 

0.6 

4,500    . 

72,000 

0.8 

0.3 

7,500    . 

26,500 

0.5 

0.1 

12,500    . 

45,000 

1.5 

0.2 

75,000    . 

1,787 

0.4 

0.1- 

1,000,000    . 

100 

0.3 

0.1- 

2,500,000    . 

34 

0.2 

0.1- 

5,000,000  (and  over) 

10 

0.3 

0.1- 

'  It  is  to  be  noticed  in  the  above  table  that  the  number  of 
annual  incomes  of  $1000  or  less  (column  2)  is  relatively  twice  as 
great  (column  4)  as  the  share  of  the  total  income  received  by 
that  group  (column  3) ;  also  that  as  the  average  income  rises  it 


DISTRIBUTION   OF  WEALTH 


287 


enjoys  an  increasingly  large  proportion  of  the  total  income  (com- 
pare columns  3  and  4). 

Expenditure  of  famil:f^  incomes.  —  Quite  as  important  as  the 
differences  in  the  sizes  of  incomes  is  the  manner  in  which  families 
of  various  groups  expend  their  respective  incomes.  Some  years 
ago  the  United  States  Commission  of  Labor  made  the  following 
estimate : 


Object  op  Expenditure 

Income 

Under 

$200 

Income 
$300 

AND 

Under 
$400 

Income 
$500 

AND 

Under 
$600 

Income 
$700 

AND 

Under 
$800 

Income 
$900 

AND 

Under 
$1000 

Income 
$1200 

AND 

Over 

Percent 

Per  Cent 

Percent 

Per  Cent 

Per  Cent 

PerCeta 

Food 

49.64 

45.59 

43.84 

38.89 

34.34 

28.63 

Rent 

15.48 

14.98 

15.15 

15.60 

14.96 

12.59 

Clothing 

12.82 

14.14 

15.27 

16.33 

16.84 

15.71 

Fuel 

7.07 

6.04 

5.63 

4.42 

4.00 

2.57 

Lighting 

1.01 

0.98 

0.97 

0.88 

0.74 

0.45 

All  other  purposes     , 

13.98 

18.27 

19.14 

23.88 

29.12 

40.05 

Many  other  investigations  of  incomes  have  been  made  and 
all  seem  to  point  to  the  same  general  conclusion : 

1.  As  the  income  of  a  family  increases  the  relative  amount 
spent  for  food  decreases. 

2.  Approximately  the  same  relative  amount  is  spent  for  rent 
irrespective  of  size  of  income. 

3.  Increase  in  income  is  accompanied  by  an  increase  in  the 
amount  spent  for  education,  recreation,  amusement,  etc. 


66.  Some  Social  Problems  Arising  from  Distribution 

Class  antagonism.  —  We  can  now  see  that  the  members  of  our 
modern  industrial  society  may  be  grouped  according  to  the 
shares  of  income  —  wages,  rent,  interest,  and  profit ;  also 
according  to  total  income  irrespective  of  its  source.  In  either 
case  there  is  a  cause  for  class  antagonism,  particularly  on  the 


288  ELEMENTARY   ECONOMICS 

part  of  those  whose  incomes  are  relatively  low.  Any  self- 
respecting  head  of  a  family  with  an  income  of  less  than  eight 
hundred  dollars  —  there  are  millions  *bf  them  —  is  likely  to 
regard  such  inequalities  of  income  and  wealth  as  appear  in  the 
preceding  table  as  a  rank  social  injustice ;  while  those  having 
still  lower  incomes  are  tempted  to  hate  an  industrial  system  that 
permits  such  differences.  They  naturally  take  the  position 
that  no  one  family  deserves  or  needs  an  income  equal  to  the 
total  income  of  a  fairly  large  city  composed  of  laborers.  The 
most  stolid  of  them  know  perfectly  well  that  the  interests  of 
industrial  society  are  not  furthered  by  permitting  one  man  or 
one  set  of  men  to  appropriate  for  their  own  use  hundreds 
of  millions  of  dollars'  worth  of  wealth.  By  a  simple  calculation 
they  see  single  Americans  controlling  more  property  than  the 
entire  total  taxable  property  in  a  city  like  Des  Moines  or  Indian- 
apolis. They  see  the  income  of  a  small  group  of  capitalists  equal 
the  total  income  of  all  the  laborers  of  a  city  like  Cleveland  or 
Denver.  What  wonder,  then,  that  there  is  social  unrest  and 
class  antagonism ! 

Entirely  different  is  the  usual  attitude  taken  by  the  mem- 
bers of  the  higher  income  groups  toward  their  less  fortunate 
brethren.  They,  on  their  part,  are  satisfied  with  existing 
conditions ;  and  in  this  self-satisfaction  lie  the  dangers  that 
always  mark  class  antagonism.  Too  often  they  explain 
misery  and  poverty  by  saying  that  it  is  the  result  of  indolence, 
intemperance,  or  vice ;  failing  to  see,  however,  that  intemper- 
ance, for  example,  is  a  result  as  well  as  a  cause  of  poverty. 
Fortunately,  serious-minded  men  and  women  are  attacking  the 
problem  of  inequality  in  a  business-like  manner.  Instead  of 
scattering  alms  among  the  poorly  paid,  as  did  the  sultans  of 
Arabian  Nights  fame,  they  are  teaching  men  and  women  how 
to  help  themselves,  not  only  by  increasing  their  incomes,  but 
also  by  spending  them  to  better  advantage.     Few  expect  or 


DISTRIBUTION  OF  WEALTH  289 

even  desire  to  see  property  holdings  or  incomes  made  equal. 
Few  object  to  the  comforts  and  luxuries  of  the  rich.  Few 
dream  of  an  industrial  millennium  in  which  no  distinguishing 
marks  shall  separate  one  group  from  another.  Many,  however, 
are  determined  that  the  dirty  tenement  must  go,  that  the  sub- 
merged tenth  must  be  made  self-supporting,  that  free  and 
universal  education  must  become  a  reality,  and  that  every  one 
must  have  a  fair  chance  to  develop  himself  industrially.  If 
this  spirit  of  service  and  helpfulness  ever  pervades  the  upper 
income  groups,  which  it  must  if  American  society  and  democ- 
racy are  not  to  be  endangered,  we  may  expect,  not  necessarily 
a  levehng  of  incomes,  but  certainly  a  more  equitable  distribution. 
Industrial  ineflSciency.  —  Either  extreme  in  the  matter  of 
income  tends  to  make  its  possessors  industrially  inefficient.  It 
is  trite  to  say  that  a  man  whose  income  is  insufficient  to  nourish 
his  body  properly  is  an  inefficient  worker.  Since  millions  of 
men  and  even  whole  families  have  such  an  income,  it  follows 
that  great  numbers  of  workers  in  this  country  are  inefficient. 
Employers  contend  that  they  cannot  pay  more  wages  until 
efficiency  is  increased;  but  efficiency  cannot  be  increased 
without  an  increase  in  wages.  Here  clearly  is  the  place  for 
society  to  do  what  no  employer  feels  justified  in  doing  and  what 
few  inefficient  workers  can  do  for  themselves.  Already,  as 
we  have  seen,  individuals  and  private  associations  are  working 
in  this  direction.  But  this  is  not  the  work  of  one  or  two  or  of 
a  hundred.  Society  alone  can  reap  the  reward  of  a  widespread 
elevation  of  industrial  efficiency.  Society,  therefore,  ought  to 
bear  the  expense  of  elevating  it.  Again,  too  high  an  income 
also  tends  to  industrial  inefficiency.  Nothing  has  yet  been 
found  that  can  take  the  place  of  the  desire  for  comfort  and 
moderate  luxury  as  a  stimulus  to  economic  activities.  A  high 
salary,  for  example,  is  a  fair  indication  of  efficiency,  but  not, 
by  any  means,  a  caiLse  of  efficiency. 


290 


ELEMENTARY   ECONOMICS 


Proportion  of  all  Homes  Owned  Free, 
Owned  Encumbered,  and  Rented,  by 
States:   1910. 


^t  P*. 


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O.INCUMMIIID    \fW^  mWTIB 


No  account  of 
the  causes  of  in- 
dustrial inefficiency 
would  be  complete 
without  some  no- 
tice of  the  effects 
of  indolence,  intem- 
perance, and  vice. 
It  seems  to  be  a  law 
of  human  nature 
that  all  work  is 
more  or  less  irk- 
some. Fortu- 
nately, a  majority 
of  people  possess 
enough  will  power 
to  overcome  indo- 
lence. There  are 
those,  however,  who 
prefer  privation 
and  even  hunger  to 
manual  or  mental 
labor.  Their  great- 
est need  is  ambi- 
tion. The  drinking 
of  alcoholic  liquors 
also  destroys  effici- 
ency. Scientists  are 
agreed  that  no  one 
can  be  at  his  best 
with  the  least  trace 
of  alcohol  in  his  sys- 
tem.    Managers  of 


DISTRIBUTION  OF  WEALTH  291 

large  industrial  plants  are  unanimous  in  their  testimony  that 
the  drinking  habit  among  employees  is  the  chief  source  of  their 
inability  to  get  a  maximum  production.  Fortunately,  this 
source  of  inefficiency,  owing  largely  to  the  stand  taken  by 
employers,  is  rapidly  disappearing.  Vice,  which  likes  to 
associate  itself  with  alcohol,  also  destroys  industrial  efficiency. 
Gambling,  loafing  in  billiard  rooms,  and  sexual  abuses  unfit 
one  for  economic  activity. 

Midway  between  these  sources  of  inefficiency  and  the  ineffi- 
ciency itself,  is  illness.  First  comes  indolence,  intemperance,  or 
vice ;  next,  bodily  or  mental  illness,  and  then,  industrial  in- 
efficiency. The  indolent  man  is  usually  ill  or  easily  made  so 
when  there  is  a  prospect  of  work.  Intemperance  leads  to  all 
sorts  of  ills.  So  also  does  vice.  There  are  those  unfortunates, 
however,  that  must  not  be  blamed  for  their  physical  or  mental 
shortcomings.  Some  are  born  incapacitated  for  work,  some 
are  the  victims  of  greed  or  accident,  some  are  undernourished 
in  spite  of  their  best  efforts  and  intentions.  These  deserve  first 
consideration  at  the  hands  of  society. 

67.   Proposed  Solutions 

Voluntary.  —  We  have  already  noticed  the  attempts  of  in- 
dividuals and  associations  to  equalize  distribution  by  carrying 
charity  and  education  to  those  who  need  help.  We  may  now 
examine  briefly  some  ambitious  attempts  to  secure  for  various 
classes,  particularly  for  workers,  a  larger  share  of  the  social 
income  by  securing  for  them  a  portion  of  the  shares  that  usually 
go  to  other  factors  of  production. 

Cooperation  in  retailing,  particularly  in  foodstuffs,  has  had 
some  success  in  this  country,  though  to  a  much  less  extent  than 
in  England.  The  chief  aim  of  cooperative  enterprises  is  to 
eliminate  the  enterpriser,  and  thus  to  divide  the  profits  which 
would  ordinarily  go  to  him  among  the  members  of  the  enterprise. 


292  ELEMENTARY   ECONOMICS 

Even  among  the  higher  income  groups,  attempts  are  often  made 
by  individuals  associated  together  to  increase  their  incomes  in 
the  same  way.  Cooperative  dairying,  cooperative  grain-buying, 
and  mutual  fire  insurance  organizations  are  examples. 

Compulsory.  —  Society  has  through  taxation  already  done 
something  in  the  way  of  equalizing  distribution.  The  poorest 
child  in  New  York  has  as  many  privileges  in  the  city  parks  as 
has  the  largest  taxpayer.  Nor  are  distinctions  made  in  the 
matter  of  schools,  of  police  protection,  of  fire  protection,  of 
sanitary  regulations,  or  of  garbage  collection.  Such  pubUc 
activities  as  these,  which  are  supported  by  public  taxation, 
relieve  the  lower  income  groups  of  a  heavy  burden,  thereby 
securing  for  them  indirectly  a  larger  portion  of  the  social  income 
than  they  would  otherwise  get.  Still  another  method  of  lessen- 
ing inequalities  in  distributipn  by  taxation  is  shown  by  the 
inheritance,  excess-profit,  and  income  taxes.  In  each  case, 
those  who  have  much  are  compelled  by  force  of  law  to  give,  indi- 
rectly to  be  sure,  to  those  who  have  little. 

The  socialists,  about  whom  we  shall  have  more  to  say  farther 
on,  propose  that  the  state  itself  assume  all  the  functions  of  the 
capitahst  and  the  enterpriser,  thereby  securing  for  the  workers 
the  entire  amount  of  interest  and  profits  that  now  goes  to  these 
two  classes.  For  that  reason  socialism  is  a  distributive  problem. 
It  is  significant  to  note  in  this  connection  that  many  of  the 
enterprises  recently  undertaken  by  the  government,  such 
as  the  construction  of  irrigation  dams  and  ditches,  are,  despite 
the  opposition  that  has  developed  against  anything  socialistic, 
advocated  by  socialists. 

EXERCISES  AND   PROBLEMS 

A 

1.  Define '•distribution." 

2.  Why  are  profits  and  taxes  shares  in  distribution  ? 

3.  What  is  the  intimate  relation  between  free  land  and  distribution  ? 


DISTRIBUTION  OF  WEALTH  293 

4.  What  shares  in  distribution  went  to  the  pioneer  farmer? 

5.  Why  is  it  said  that  free  land  receded  westward  ? 

6.  Just  how  did  the  laborer  lose  control  of  his  tools  ? 

7.  What  during  the  past  century  has  caused  the  lines  separating  the 
shares  in  distribution  to  become  more  distinct? 

8.  Why  is  there  such  a  great  inequality  in  wealth  ? 

9.  Suggest  some  method  for  removing  this  inequality. 

10.  What  is  the  relation  between  income  and  industrial  efficiency? 

11.  Name  and  evaluate  the  causes  of  inefficiency. 

12.  Why  is  society  interested  in  the  efficiency  of  the  individual  ? 

13.  Just  how  does  taxation  tend  to  equalize  wealth  and  income  ? 

B 

1.  List  the  names  of  the  heads  of  families  in  your  block. 
a.  Estimate  the  income  of  each  family. 

6.  Are  there  any  noticeable  variations  among  these  incomes? 

c.  Which  families  belong  to  the  higher  income  groups  ?  the  lower 

income  groups  ? 

d.  How  does  the  average  family  income  compare  with  the  average 

family  income  of  your  community? 
c.   How  does  your  own  family  income  compare  with  the  average 
family  income  of  your  block? 

2.  Estimate  roughly  the  incomes  of  the  families  represented  in 
your  class.  With  this  estimate  as  a  basis,  what  are  your  conclusions 
as  to  the  diffusion  of  education  among  the  masses  ? 

3.  Interview  persons  in  different  income  groups. 

a.  Do  you  find  any  spirit  of  class  antagonism  ?     Analyze. 

h.  What  reasons  do  you  find  advanced  to  explain  inequalities  ? 

c.  Inquire  about  solutions  of  the  problem. 

d.  Formulate  your  own  conclusions  in  the  matter. 

4.  From  observation  and  inquiry  determine  as  accurately  as  possible 
how  business  men  regard  the  following : 

a.  Drinking  of  intoxicating  liquors. 
6.  Irregular  hours. 

c.  Habits  that  destroy  mental  or  physical  strength, 

d.  Expensive  tastes. 

e.  Idleness  and  loafing. 

5.  Supix)se  you  were  asked  to  devise  a  scheme  for  equalizing  incomes 
through  taxation. 


294  ELEMENTARY   ECONOMICS 

a.  What  public  enterprises  would  you  create  or  enlarge  ? 

h.  How  would  you  regard  the  extension  of  public  education? 

c.  Would  you  favor  supplying  free  bread  or  free  meat?     Why, 

or  why  not  ? 
i.  How  does  c  differ  from  6? 
ii.  Which  would  meet  the  greater  opposition? 

d.  Would  you  exempt  all  except  the  very  rich  from  paying  taxes? 

Why? 

C 

1.  "Poverty  is  an  individual  matter.  No  man  need  be  pbor  in  a 
country  like  the  United  States,  where  industry  constantly  cries  for 
laborers."     Comment  on  the  above  statement. 

2.  Many  well-to-do  men  argue  that  it  is  little  or  no  concern  of  theirs 
if  individuals  refuse  to  be  temperate  and  thrifty. 

a.  Is  this  a  correct  attitude? 

h.  Under  what  circumstances  is  society  to  blame  for  intenipe:*- 
ance  ? 

c.  Would  the  well-to-do  be  profited  financially  by  an  increase  in 

temperance  or  thrift  ?     Explain. 

d.  Should  "the  strong  bear  the  burdens  of  the  weak"  ? 

3.  What  is  the  relation  of  each  of  the  following  to  attempts  to  dis- 
tribute wealth  and  income  more  equally  through  taxation : 

a.  Free  public  education? 
6.  City  parks? 

c.  City  milk  inspection  ? 

d.  Public  highways? 

e.  Pure-food  laws  ? 

/.   Free  band  concerts  ? 

g.  Public  recreation  grounds  ? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  411-423. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  384-406. 

Fetter,  Economics,  Vol.  II,  pages  470-490. 

Fisher,  Elementary  Principles  of  Economics,  pages  476-486. 

Seager,  Principles  of  Economics,  pages  170-197. 


CHAPTER   XXII 
RETURN   TO   LABOR    (WAGES) 

68.    NONCOMPETING   GrOUPS   OF   WORKERS 

Existence  of  these  groups.  —  Practically  every  one  engaged 
in  economic  activities  may  be  said  to  be  a  worker,  and  as  such  to 
receive  wages  in  some  form.  Employees  are  not  the  only  ones 
who  earn  wages.  A  portion  of  the  income  which  goes  to  enter- 
prisers of  all  sorts — farmers,  merchants,  independent  mechanics, 
and  professional  men  —  is  wages.  These  workers  may  be 
divided  into  rather  distinct  groups,  and  each  group  in  turn 
divided  into  an  indeterminate  number  of  subgroups.  At  the 
top  are  captains  of  industry,  manufacturers,  merchants,  pro- 
fessional men,  clerks,  and  public  officials.  This  group  is 
distinguished  from  the  other  group  by  its  relatively  high  incoma 
level.  Among  economists  it  bears  various  titles,  such  as  "  soft- 
handed,''  "  kid-glove,"  and  "  white-collar."  This  group  may  be 
divided,  according  to  income,  into  two  subgroups  :  captains  of 
industry  and  a  few  highly  paid  professional  men  comprise  one  ; 
in  the  other  subgroup  are  found  the  rank  and  file  of  professional 
men,  clerks,  and  all  others  whose  labor  is  not  characterized  by 
hard  manual  work.  The  second  group,  the  ''  hard-handers," 
enjoys  less  income  as  a  group,  though  in  this  respect,  its  higher 
paid  members  stand  ahead  of  the  lower  members  in  the  first 
group  ;  that  is,  the  two  groups  overlap  in  the  matter  of  income. 
In  this  lower  group  may  be  distinguished  three  subgroups  :  -  (1) 
highly  paid  manual  laborers,  such  as  railroad  engineers,  expert 
machinists,  and  glass  blowers ;   (2)  the  rank  and  file  of  skilled 

295 


296  ELEMENTARY   ECONOMICS 

laborers ;  (3)  unskilled  laborers.  The  first  of  these  three  sub- 
groups comprises  the  aristocracy  of  the  manual  laborers.  Its 
members  enjoy  a  much  higher  income  level  than  do  millions  of 
professional  men,  farmers,  merchants,  clerks,  and  public  officials. 
In  fact,  those  in  subgroup  number  two,  and  even  some  in  the 
third,  rank  higher  in  the  matter  of  income  than  the  poorest  paid 
workers  among  the  soft-handed  group. 

The  question  may  properly  be  asked  why  workers  do  not 
promptly  overcrowd  the  higher-paid  positions,  thereby  tending 
to  equalize  the  incomes  of  all,  irrespective  of  the  nature  of  their 
employment.  An  adequate  answer  involves  many  consider- 
ations. First,  only  those  of  superior  ability  can  possibly  reach 
the  higher  levels  among  the  '^soft-handers."  Second,  a  ma- 
jority of  workers  are  unable  or  unwilHng  to  undergo  the  long 
preparation  necessary  to  attain  the  positions  held  by  the  pro- 
fessional groups.  Third,  many  persons  are  not  physically  fit  to 
perform  the  labor  required  of  such  workers  as  engineers. 
Fourth,  the  opportunity  of  advancement  is  greater  in  the  "  soft- 
handed  '*  group.  Fifth,  many  persons  prefer  minor  '*  positions  " 
which  do  not  bring  them  into  contact  with  the  dirt  and  grime 
of  industry  to  a  higher-paid  ''job"  which,  in  their  minds,  is 
dirty  and  degrading. 

We  say  that  these  groups  are  noncompeting  because  the 
members  of  one  group  do  not  compete  against  the  members  of 
another  group.  The  members  of  each  group,  however,  compete 
among  themselves.  This  they  do  both  directly  and  indirectly. 
Ordinarily,  the  purchasing  power  which  the  typical  consumer  has 
to  distribute  among  the  members  of  any  one  of  these  groups  is 
fixed  within  rough  limits.  What  goes  to  one  member  must  be 
withheld  from  another.  Money  spent  for  dental  work  might 
have  been  used  to  pay  an  architect  for  drawing  a  house  plan. 
Indirect  competition  is  also  important.  Physicians,  to  be  sure, 
cannot  step  into  the  law  courts  as  attorneys,  but  their  children 


RETURN   TO    LABOR    (WAGES)  297 

can  easily  become  lawyers.  Likewise,  the  children  of  lawyers 
may  take  up  the  practice  of  medicine.  In  either  case  the 
tendency  is,  if  not  to  stay  in  the  same  profession,  to  remain  in 
the  same  noncompeting  group,  which,  in  the  long  run  has  the 
same  effect. 

Movement  among  the  groups.  —  Certain  forces  tend  to  accel- 
erate the  movement  of  individuals  from  one  group  to  another, 
while  other  forces  tend  to  retard  such  movement.  We  like  to 
boast  of  the  opportunities  which  every  boy  has  in  this  country 
to  follow  his  bent  in  choosing  a  trade  or  profession.  Un- 
doubtedly there  are  good  grounds  for  this  boast.  Examples  of 
individuals  rising  from  poverty  to  affluence  are  not  wanting. 
Here  a  great  captain  of  industry  began  life  as  an  office  boy ; 
there  a  noted  physician  sprang  from  the  ranks  of  the  illiterate. 
Less  noticeable,  because  they  are  less  extreme,  are  the  millions 
of  cases  of  individuals  moving  from  the  ranks  of  unskilled  labor 
to  the  subgroup  above,  from  farm  laborer  to  farm  tenant  to 
farm-owner,  from  the  poorer  paid  professions  to  the  higher  paid 
ones.  Thus  there  is  a  constant  movement  upward.  There  is 
also  a  movement  downward,  much  less  in  volume  and  extent 
than  the  one  upward,  and  not  nearly  so  important.  It  is  a 
filtering  process  largely  caused  by  poor  health,  misfortune, 
indolence,  lack  of  ambition,  and  intemperance. 

These  movements  among  industrial  groups  meet  more 
obstacles  than  a  great  many  people  suspect.  The  son  of  an 
unskilled  laborer,  other  things  being  equal,  has  a  poorer  chance 
to  become  a  physician,  than  has  the  son  of  a  lawyer  or  a  mer- 
chant. He  lacks,  first,  a  proper  home  environment;  second, 
an  ambition  to  attain  a  relatively  high  industrial  position; 
and,  third,  the  means  of  getting  the  necessary  preparation  which 
members  of  the  upper  groups  must  have.  An  examination  of 
the  industrial  groups  of  any  community  will  bear  out  this 
statement.     Suppose  we  study  the  family  histories  of  a  group 


298 


ELEMENTARY   ECONOMICS 


Average  Number  of  Wage-Earners  by  Industries  :   1909. 


HuNoneos  or  thousands 


^IRON    ANO    STCCL,  STCCL  WORKS,  AND    ROLCINO    MIkkS. 


^SLAUQHTERINe    AND    MEAT    PACKING 


;  ELECTRICAL      MACHINERY 


wwwvmmx 


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AUTOMOBILES 


COPPER, TIN,  AND    SHEET    IRON 


>>M>»>)m»>\ 


pCARRIAGES    AND    WAGONS 


CANNING    ANO     PReSCRVINQ 


AGRICULTURAL     IMPLCMKNT^ 


CARS,  STEAM     RAILROAD 


BRASS   ANO  ORONZC 


RETURN   TO   LABOR    (WAGES)  299 

of  carpenter's  apprentices.  Some  are  almost  sure  to  come  from 
the  ranks  of  unskilled  labor,  while  the  rest  belong  to  the  skilled 
mechanics  group.  Only  occasionally  should  we  find  among  them 
the  son  of  a  lawyer,  doctor,  merchant,  or  teacher.  Suppose 
further  that  we  should  question  the  students  of  medical  colleges 
concerning  the  industrial  status  of  their  parents.  A  few,  but 
only  a  few,  might  answer  that  their  respective  fathers  were 
carpenters,  or  plumbers,  or  electricians,  or  even  unskilled 
laborers.  Most  of  them,  however,  would  say  that  their  respec- 
tive fathers  were  professional  or  business  men,  such  as  lawyers, 
dentists,  teachers,  merchants,  and  farmers. 

Education  and  income.  —  If,  as  we  have  said,  the  students 
of  a  professional  school  or  college  belong  to  the  upper  income 
groups,  the  question  naturally  arises.  What  is  the  relation  be- 
tween public  education  and  income  ?  One  of  the  reasons  usually 
given  for  expending  large  sums  of  money  on  public  education  is 
that  it  helps  to  equalize  industrial  opportunity  —  that  is,  public 
education  tends  to  start  all  alike  in  the  industrial  race.  Just 
how  far  is  this  reasoning  valid  ?  It  is  a  well-known  fact  that  an 
educated  person,  other  things  being  equal,  is  more  efficient  than 
one  uneducated ;  also  that  increased  efficiency  leads  to  higher 
incomes.  It  is  equally  well  known  that  education  beyond  the 
grades,  certainly  beyond  the  high  school,  requires  an  outlay  of 
money  which  only  a  relatively  few  families  can  afford  to  make  ; 
and  these  families,  let  us  not  forget,  already  belong  to  the  higher 
income  groups.  Hence,  education  is  not  only  a  cause,  but  also 
a  result  of  relatively  high  incomes. 

If  we  should  question  the  existence  of  this  close  mutual 
relationship,  we  have  but  to  turn  for  corroborative  evidence  to 
the  income  schedules  which  appear  in  the  preceding  chapter. 
There  we  find  a  large  majority  of  families  getting  less  than  a 
thousand  dollars  a  year  each,  while  millions  of  them  are  com- 
pelled to  subsist  on  half  the  amount.    Families  with  such  in- 


300  ELEMENTARY   ECONOMICS 

comes  find  it  increasingly  difficult  to  keep  the  children  in  school 
as  they  advance  from  one  grade  to  another.  By  the  time  they 
reach  high  school  age  but  few  of  them  remain.  One  after  an- 
other of  those  who  enter  high  school  withdraw  to  go  into  in- 
dustry, so  that  by  the  time  the  senior  year  is  reached  the 
number  left  is  greatly  reduced.  The  next  educational  step  they 
find  the  most  difficult  of  all.  So  difficult  is  it  that  few  have  the 
courage  to  undertake  it,  for  ^'  going  "  to  college  or  a  technical 
school  for  a  long  period  of  years  is  not  to  be  faced  lightly  even 
by  those  who  have  financial  backing.  Under  such  conditions 
it  is  not  difficult  to  understand  why  the  higher  income  groups 
have  a  virtual  monopoly  of  higher  education;  and  why,  as 
a  result,  education  depends  on  income  quite  as  much  as  income 
depends  on  education. 

Our  notion  of  the  ease  with  which  individuals  are  able  to 
pass  from  lower  to  higher  income  groups  is  often  based  on  a  mis- 
understanding of  the  nature  of  these  groups.  We  point  to  the 
fact  that  a  certain  successful  business  man  began  life  as  a 
newsboy,  which  may  or  may  not  be  significant  in  this  con- 
nection; for  not  all  newsboys  by  any  means  belong  to  the 
ranks  of  unskilled  labor  or  even  of  skilled  labor.  So  it  is  with 
boys  that  sweep  out  offices,  run  errands,  clerk  in  stores  on 
Saturdays,  or  spend  their  summers  on  the  farm.  It  is  repeatedly 
pointed  out  that  the  farm  and  the  small  town  serve  as  excellent 
sources  from  which  successful  city  business  men  are  recruited. 
There  is  no  denying  that  this  has  been  the  case ;  yet,  true  as 
the  statement  is,  it  should  not  carry  the  implication  that  these 
boys  were  drawn  from  the  lowest  income  groups.  It  would  be 
nearer  correct  to  say  that  a  majority  of  them,  despite  their 
success,  never  leave  the  group  in  which  they  were  born ;  for, 
from  the  standpoint  of  education,  there  is  practically  no  differ- 
ence between  a  family  income  of  two  or  three  thousand  dollars 
a  year  and  one  a  hundred  times  as  great. 


RETURN   TO   LABOR    (WAGES) 


301 


Per  Cent  Attending  School  in  the  Total  Poptjlation  and  in 
Certain  Classes  6  to  20  Years  of  Age:   1909-1910. 


I  OP 


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ACE 


302  ELEMENTARY   ECONOMICS 

Choosing  among  income  groups.  —  Obviously,  the  boys 
belonging  to  the  higher  income  groups  have  an  advantage  over 
those  of  lower  groups  in  the  matter  of  choosing  their  life's  work, 
and  hence,  roughly  speaking,  the  size  of  their  wage  income. 
To  simplify  the  problem  let  us  assume  that  a  normal  boy  about 
to  be  graduated  from  high  school  is  trying  to  decide  whether  he 
will  enter  business  with  the  view  in  mind  of  becoming  an  enter- 
priser, of  studying  for  one  of  the  professions,  or  of  learning  a 
trade.  What  shall  be  the  determining  factor  in  the  decision? 
First  of  all,  he  must  decide  to  his  own  satisfaction  the  definition 
of  success.  If  to  have  command  over  capital  and  labor,  and  to 
enjoy  a  relatively  high  income  is  the  goal,  then  the  answer 
must  be  business.  If,  on  the  other  hand,  his  goal  is  a  moderate 
income  combined  with  leisure  and  a  certain  kind  of  content- 
ment, he  ought  to  choose  a  profession  or  a  trade.  In  making 
the  choice,  however,  certain  well-known  facts  concerning  the 
prohahility  of  success  should  be  taken  into  account.  Business  is 
much  like  a  lottery  with  its  few  capital  prizes  and  many  blanks. 
For  every  successful  business  man  in  a  large  way  there  is  a 
multitude  composed  of  mediocre  ones  and  failures.  Every 
large  city  has  a  throng  of  struggling  shopkeepers  to  set  over 
against  its  relatively  few  merchant  princes.  The  boy,  there- 
fore, that  would  enter  business  must  be  prepared  to  assume  the 
risks  which  it  necessarily  entails.  In  the  professions  and  trades, 
however,  the  situation  is  different.  There  no  huge  money  prizes 
and  but  few  blanks  exist.  Any  one  with  ability  enough  to 
complete  a  high  school  course  can  look  with  a  reasonable  degree 
of  assurance  toward  making  a  comfortable  living  and  a  fair 
financial  success  as  a  lawyer,  doctor,  teacher,  engineer,  architect, 
or  skilled  mechanic.  Beyond  this  a  few  can  go,  reaching  the 
financial  level  occupied  by  high-salaried  officials  of  railroad  or 
insurance  companies ;  but  none  can  hope  to  amass  the  wealth 
of  a  Rockefeller  or  a  Carnegie.     Now  and  then  we  find  a  pro- 


RETURN   TO    LABOR    (WAGES)  303 

fessional  man  who  has  by  his  own  skill  and  talent  accumulated 
a  million  dollars,  but  this  is  not  a  capital  prize  in  an  industrial 
society  which  includes  in  its  membership  thousands  of  million- 
aires. 

69.   Efficiency  and  Wages 

Conditions  affecting  efficiency.  —  Differences  in  efficiency  of 
workers  may  be  easily  observed  on  every  hand.  Sometimes 
these  differences  exist  in  the  workers  themselves.  Two  men 
working  side  by  side  at  similar  tasks  often  produce  unequally. 
One  is  alert  and  nimble  ;  the  other,  sluggish  and  awkward.  One 
takes  pride  ii;  his  work,  the  other  grumbles  at  his  lot  and  watches 
the  clock.  Each  is  the  creature  of  birth,  training,  and  habit. 
Industrial  efficiency  varies  also  from  place  to  place  among 
workers  of  equal  ability.  One  manufacturing  plant,  for  example, 
provides  recreation  grounds,  rest  rooms,  lighted  workshops,  and 
sanitary  surroundings.  Here  workers,  other  conditions  being  the 
same,  can  produce  more  than  can  an  equal  number  in  a  plant 
less  well  equipped.  Differences  among  peoples  also  play  an  im- 
portant part  in  efficiency.  A  Chinese  coolie  is  no  match  for  an 
American  laborer.  One  is  listless,  uneducated,  and  small  of 
stature  ;  the  other,  directly  opposite  in  every  detail.  In  China 
it  is  a  common  sight  to  see  four  or  five  men  lifting  a  load  which 
one  man  in  this  country  could  lift  with  ease. 

Wages  and  industrial  efficiency.  —  Since  there  are  such 
great  differences  in  degrees  of  efficiency,  the  question  naturally 
arises  :  What  is  the  relation  of  efficiency  to  wages?  In  the  case 
of  the  two  workers  side  by  side,  the  more  efficient  one,  if  they 
were  doing  piece  work,  would  get  the  higher  wage.  If,  as  is  often 
the  case,  the  two  men  had  previously  agreed  to  work  for  the  same 
wage,  then  no  difference  v^ould  exist,  the  wages  of  either  being  not 
greater  than  the  contribution  of  the  less  efficient  to  the  product. 
Differences  in  wages  may  or  may  not  occur  when  similar  work  is 


304 


ELEMENTARY   ECONOMICS 


Copyright  Underwood  &  Underwood,  New  York 

A  Group  op  School  Children  Being  Fed  at  Public  Expense. 


RETURN   TO   LABOR    (WAGES)  305 

being  carried  on  in  different  plants.  Clearly,  the  workers  in  the 
better  equipped  plant  will  turn  out  a  larger  product  than  those 
in  the  poorer  plant ;  yet  if  the  difference  is  absorbed  in  paying 
for  athletic  fields,  rest  rooms,  and  other  devices  for  securing 
efficiency,  the  employer  has  no  more  to  distribute  among  his 
employees  than  does  the  owner  of  the  poorer  plant.  We  may 
say,  however,  with  assurance,  that  physical  conditions  which 
contribute  to  efficiency  usually  earn  more  than  their  cost. 
When  we  compare  the  efficiency  of  one  nation  with  that  of 
another  we  are  sure  to  find  the  most  efficient  group  getting  the 
largest  wage.  Coolie  labor,  which  we  have  noticed  as  being 
inefficient,  is  poorly  paid.  A  Chinese  unskilled  laborer  can  be 
employed  for  a  few  cents  a  day,  and  even  at  that  he  is  highly 
paid,  for  his  efficiency  is  extremely  low. 

The  relation  between  wages  and  industrial  efficiency  is 
mutual.  Stupidity  and  awkwardness  .may  result,  as  we  noticed 
in  the  preceding  chapter,  from  low  wages.  An  underfed  work- 
man is  in  no  shape  to  do  his  best.  He  is  listless  and  he  soon 
grows  weary  with  his  task.  It  is  an  easy  matter  to  say  to  him 
that  the  way  to  secure  an  increased  wage  is  to  increase  his 
efficiency.  It  is  an  entirely  different  matter,  however,  to  per- 
suade him  to  make  additional  efforts  without  providing  him  with 
sufficient  food,  clothing,  and  shelter  to  make  the  efforts  possible. 
Fortunately,  enterprisers  like  Henry  Ford  have  had  the  courage 
to  try  the  experiment  of  increasing  efficiency  by  increasing 
wages;  and  we  are  told  by  unbiased  observers  that  these 
experiments,  particularly  the  one  at  the  Ford  plants,  have 
succeeded.  Here  may  be  the  solution  of  one  of  the  most  per- 
plexing problems  in  American  industrial  life. 

Women  in  industry.  —  One  of  the  pressing  industrial  ques- 
tions of  the  present  generation  is  the  relation  of  the  efficiency 
of  woman  labor  to  wages ;  and  this  question  has  been  accen- 
tuated by  conditions  growing  out  of  the  Great  War.     The  slogan 


306  ELEMENTARY    ECONOMICS 

of  organized  labor  has  been  "  equal  wages  for  equal  work,'* 
meaning  thereby  that  no  distinction  should  be  made  between 
men  and  women  in  paying  wages  for  similar  work.  For  a 
variety  of  reasons  the  scale  of  wages  for  women  has  generally 
been  lower  than  that  for  men,  even  when  the  two  groups  were 
doing  the  same  work.  Often,  however,  work  appears  to  be  the 
same  when  it  is  not.  The  mere  fact  that  a  man  and  a  woman 
fill  similar  industrial  positions  is  no  conclusive  test  of  their 
relative  efficiency.  One,  for  example,  may  need  less  super- 
vision, or  is  a  more  steady  worker,  or  has  greater  ambition  to 
succeed.  Such  factors  as  these  are  important  and  must  \)e 
taken  into  account  in  any  thoroughgoing  discussion  of  the 
relation  of  woman  labor  to  wages.  We  can  do  nothing  more  in 
this  connection  than  to  point  out  the  problems. 

70.   Methods  of  Wage  Payment 

Time  and  piece  wages.  —  The  most  common  method  em- 
ployed to  remunerate  labor  is  to  pay  according  to  time  or  to  the 
labor  done.  Obviously,  time  wages  are  based  on  piece  wages  for 
a  group  if  not  for  the  individual.  The  same  industry  often 
employs  both  methods.  Farmers  usually  pay  their  regular 
help  by  the  month,  but  employ  men  to  gather  corn  by  the 
bushel.  About  coal  mines  also  the  wages  of  some  employees 
depend  on  output ;  of  others,  on  time.  Organized  labor  gen- 
erally opposes  piece  wages  on  the  ground  that  the  most  efficient 
workers  are  paid  but  a  fair  wage,  while  those  less  efficient  are 
underpaid.  For  this  position  it  is  criticized  by  those  who 
argue  that  a  time  wage  takes  from  the  highly  efficient  and  gives 
to  the  inefficient.  Yet  as  labor  leaders  say,  the  interests  of  the 
few  who  might  possibly  profit  from  a  system  of  piece  wages 
must  give  way  to  the  larger  interests  of  the  whole  group. 

Piece  wages  in  some  industries  are  impossible.  What  scheme 
could  be  devised  for  paying  house  carpenters  according  to  their 


RETURN   TO   LABOR    (WAGES) 


307 


output?  Ordinarily,  the  product  of  one  cannot  be  separated 
from  the  products  of  others  on  the  same  job.  Likewise  the 
store  clerk,  while  he  may  get  a  commission  on  his  sales,  must  be 
paid  time  wages  for  his  time  spent  in  trying  to  sell  goods,  and  in 
doing  various  other  duties  about  the  store.  We  may  say,  there- 
fore, that  piece  wages  can  be  best  paid  in  those  industries  where 
each  worker's  product  is  distinguishable  from  the  products  of  his 
fellow  workers. 

Profit-sharing.  —  Numerous  schemes  have  been  devised  by 
employers  to  increase  output  by  giving  the  employees  an  interest 


Courtesy  of  Postum  Cereal  Co.,  Battle  Creek,  Michigan 

Model  Workman's  Cottage. 
This  is  but  one  of  many  homes  which  a  large  manufacturing  plant  in  the 
United  States  helped  its  employees  to  build. 

in  the  product.  One  of  these,  profit-sharing,  because  of  its 
importance,  deserves  passing  notice.  This  plan  in  general 
provides  that  at  stated  intervals  each  employee  shall  receive,  in 


308  ELEMENTARY   ECONOMICS 

addition  to  the  wages  which  he  has  drawn  regularly  each  week 
or  each  month,  a  share  of  the  profits  of  the  business.  Usually 
no  provision  is  made  for  the  employee  sharing  in  any  loss. 
Numerous  concerns  in  the  United  States  have  tried  out  this 
plan  with  varying  success.  Some  have  condemned  it  after 
trial,  others  have  praised  its  effect  on  their  business.  Its 
highest  development  has  taken  place  abroad.  In  Paris,  for 
example,  a  company  of  house  painters  instituted  the  plan 
years  ago  with  the  result  that  in  time  the  employees  themselves 
owned  the  business.  Organized  labor  has  generally  opposed 
profit-sharing  on  the  ground  that  an  employer  can  pay  bonuses 
at  stated  periods  only  by  withholding  from  his  employees  what 
is  rightfully  theirs  in  the  form  of  regular  wages. 

EXERCISES   AND   PROBLEMS 


1.  What  is  the  difference  between  wages,  and  wages  of  management  ? 

2.  On  what  ground  may  workers  be  divided  into  hard-handed  and 
soft-handed  groups  ? 

3.  Why  are  railroad  men  often  referred  to  as  the  "aristocracy  of 
the  hard-handed  group  "  ? 

4.  What  is  meant  by  the  expression  " noncompeting  groups"? 

5.  Just   how  do   doctors   and  lawyers   compete?   plumbers   and 
electricians  ? 

6.  What  is  the  relation  between  education  and  income  ? 

7.  What  are  the  exact  facts  about  the  movement  of  persons  from 
one  income  group  to  another? 

8.  What  should  be  one  of  the  guides  in  selecting  a  profession  or  a 
trade? 

9.  What  is  the  relation  between  efficiency  and  wages? 

10.  How  does  the  working  environment  affect  efficiency? 

11.  Why  is  the  cheapest  labor  often  the  highest  paid? 

12.  Why  do  business  men  usually  refuse  to  pay  inefficient  employees 
more  than  they  earn,  trusting  thereby  to  increase  their  efficiency  ? 

13.  Should  men  and  women  receive  the  same  wages  for  the  same 
work  ?     Discuss. 


RETURN  TO   LABOR   (WAOES)  SOd 

14.  WTiat  is  the  difference  between  piece  wages  and  time  wages  ? 

15.  Which  is  the  more  fundamental? 

16.  Why   does   organized  labor  generally  oppose   the   piece-wage 
system  ? 

17.  Define  "profit-sharing." 

18.  What  does  profit-sharing  attempt? 

B 

1.  Determine  by  inquiry  the  occupation  or  profession  of  the  father 
of  each  lawyer  and  doctor  in  your  ciommunity. 

a.  How  many  were  lawyers,  doctors,  or  business  men  (including 

farmers)  ? 
h.   How  many  were  unskilled  laborers  ? 

c.  Explain  any  marked   differences   that  appear  between  the 

occupations  of  the  fathers  of  the  younger  men  on  your  list 
and  the  fathers  of  the  older  ones. 

d.  Formulate  conclusions  on  your  investigation  as  to  competition 

between  members  of  the  same  noncompeting  group. 

2.  Let  each  student  in  the  economics  class  state  the  profession  or 
occupation  he  expects  to  pursue. 

a.  How  many  expect  to  compete  directly  with  their  respective 
fathers  ? 

h.  How  many  expect  to  enter  other  lines  in  the  same  non- 
competing  group? 

c.  How  many  expect  to  cross  over  into  a  group  not  occupied  by 

their  respective  fathers? 

d.  What  does  this  examination  show  regarding  the  ease  with 

which  lines  between  noncompeting  groups  can  be  crossed  ? 

3.  Make  a  list  of  several  natives  of  your  community  who  have  made 
exceptional  success  in  business. 

a.  How  did  their  respective  fathers  rank  in  the  community  as 

to  income?  as  to  wealth? 
h.  What  were  their  educational  opportunities? 
c.   Considering  differences  in  time  and  circumstance,  can  they 

offer  their  children  better  educational  opportunities  than 

they  themselves  enjoyed? 

4.  Call  to  mind  boys  engaged  in  selling  newspapers,  in  sweeping  out 
offices,  or  in  similar  occupations. 

a.  From  what  income  groups  do  these  boys  come  ? 


310  ELEMENTARY   ECONOMICS 

h.  How  many  are  the  sons  of  well-to-do  parents  ? 

c.  How  many  attend  high  school? 

d.  How  does  society  in  general  regard  this  kind  of  work  by  boys  ? 

e.  How  do  the  boys  themselves  regard  it  ? 


1.  The  statement  is  often  made  that  many  college  graduates  may 
be  found  in  the  bread  lines  of  our  cities. 

a.  What  effect  on  the  popular  mind  has  the  discovery  of  one 

college  graduate  begging  for  food  ? 
h.  Does  such  a  discovery  make  an  interesting  news  item  ?     Why  ? 

c.  What  is  the  probability  of  magnifying  such  a  discovery  ? 

d.  What  is  the  probability  of  such  a  beggar  pretending  to  be  a 

college  graduate  ? 

e.  How,  therefore,  should  the  statement  be  regarded  ? 

2.  "It  can  easily  be  proved  from  history  that  a  majority  of  the 
successful  men  of  the  United  States  were  reared  on  farms  and  attended 
country  schools." 

a.  Until  recent  times,  where  else  could  an  American  youth  be 

reared  ? 

b.  Where  else,  except  in  the  country  school,  could  the  previous 

generation  get  an  education? 

c.  What  is  likely  to  be  the  trend  in  coming  generations  ? 

3.  Discuss  the  need  of  profit-sharing  in  American  business  affairs, 
its  probable  success,  and  the  results  that  may  be  expected. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  446-460. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  427-443. 

Fetter,  Economics,  Vol.  I,  pages  211-231. 

Fisher,  Elementary  Principles  of  Economics,  pages  433-463. 

Johnson,  Introduction  <to  Economics,  pages  151-172. 

Seager,  Principles  of  Economics,  pages  244-261. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  411-428. 

Taussig,  Principles  of  Economics,  2d  ed..  Vol.  II,  pages  147-157. 


CHAPTER  XXIII 

THE    LABOR   PROBLEM 

71.   Rise  of  Organized  Labor 

Rise  and  growth  of  the  trade  union.  —  The  forces  which  have 
combined  during  the  past  generation  to  cause  employees  to  or- 
ganize were  of  slight  importance  prior  to  the  Civil  War,  and  even 
for  several  years  after  its  close.  Then  the  number  of  laborers 
in  any  one  establishment  was  relatively  small ;  and  the  oppor- 
tunity to  hold  conventions,  poor.  Besides,  the  abundance  of 
public  land  provided  an  escape  for  those  who  worked  for  wages. 
Accordingly,  only  a  few  small  unions  were  organized  prior  \o 
1860,  and  these  practically  disappeared  during  the  four  years' 
conflict  that  followed.  The  return,  in  1865,  of  more  than  a 
million  soldiers  to  the  ranks  of  industry,  the  rapid  disappearance 
of  desirable  and  accessible  public  lands,  and  the  steady  increase 
in  the  size  of  manufacturing  plants,  soon  began  to  create  a 
feeling,  particularly  in  the  eastern  states,  that  laboring  men 
ought  to  organize  for  mutual  protection  and  advancement. 
About  this  time  there  were  held  several  labor  conferences  which 
declared  (1)  for  an  eight-hour  day,  (2)  for  restriction  on  iromi- 
gration,  (3)  for  reduction  of  the  tariff,  (4)  for  a  relatively  small 
standing  army,  (5)  for  early  payment  of  the  national  debt,  and 
(6)  for  the  granting  of  public  land  only  to  actual  settlers. 
Gradually  each  trade  or  craft  organized,  until  at  the  present 
time  practically  all  skilled  trades  have  their  unions. 

Knights  of  Labor.  —  The  unions  which  we  have  just  noticed 
are  organized  according  to  trades ;  that  is,  the  carpenters,  the 

311 


312  ELEMENTARY   ECONOMICS 

plumbers,  the  bricklayers,  and  others,  have  each  their  own 
organization.  In  1869,  however,  a  Philadelphia  tailor,  U.  S. 
Stevens,  projected  an  entirely  different  kind  of  organization, 
known  as  the  Knights  of  Labor,  in  which  trade  distinctions 
should  not  appear.  Membership  at  first  was  restricted  to 
garment  workers,  but  later  it  was  thrown  open  to  all  except 
bankers,  lawyers,  professional  gamblers,  and  employees  in  the 
manufacture  or  sale  of  intoxicating  liquors.  Membership  in  a 
trade  union  was  no  bar  to  becoming  a  '' Knight."  Thus,  the 
two  types  of  organization  grew  side  by  side  without  organic 
connections.  The  aims  of  the  Knights  of  Labor  were  to  secure 
better  conditions  for  its  members  through  participation  in 
politics  rather  than  by  the  strike  or  boycott.  The  slogan  of 
the  organization  was,  "An  injury  to  one  is  the  concern  of  all." 
Thousands  of  "  lodges  "  scattered  throughout  the  country  were 
the  local  units.  These  were  closely  supervised  by  the  national 
officers.  Thus,  the  organization  was  highly  centralized — that  is, 
the  local  lodges  had  little  autonomy.  In  other  words,  authority 
came  from  the  top. 

American  Federation  of  Labor.  —  Membership  of  the  Knights 
of  Labor  reached  its  highest  point  (about  five  hundred  thousand) 
in  1886.  Already  it  was  feeling  the  oppositional  influence  of  the 
American  Federation  of  Labor,  which  had  been  organized  in 
1881.  A  little  later  the  older  organization  began  to  decline  in 
influence ;  at  the  present  time  its  place  in  labor  affairs  is  un- 
important. The  two  organizations  are  unlike  in  several 
respects.  The  Federation  favors  the  strike  and  boycott  as 
weapons  for  fighting  the  battles  of  labor.  Moreover,  as  its  name 
suggests,  it  is  a  federation  of  trade  unions,  each  governed  by  its 
own  laws  and  managed  by  its  own  officers.  Individual  members 
of  the  trade  unions  and  even  the  local  organizations  have  little 
direct  connection  with  the  Federation.  Besides  the  national 
organization  there  are  state  federations  and  city  federations. 


THE   LABOR  PROBLEM  313 

Practically  all  of  the  leading  trade  unions  of  this  country  be- 
long  to  the  Federation,  the  most  notable  exception  being  the 
railroad  brotherhoods.  Since  its  inception,  the  American  Fed- 
eration of  Labor  has  been  instrumental  in  improving  conditions 
of  labor  and  in  raising  wages. 

Industrial  Workers  of  theJWorld.  —  A  sharp  distinction  must 
be  made  between  a  trade  union  and  an  industrial  union.  One 
includes  only  workers  in  a  particular  trade.  The  other,  and  in 
this  respect  it  resembles  roughly  the  Knights  of  Labor,  includes 
all  workers  of  ati  industry  such  as  mining  or  building.  Such  a 
union  is  the  Industrial  Workers  of  the  World  (I.  W.  W.),  which 
contends  that  the  interests  of  labor  are  too  closely  knit  together 
to  permit  its  members  to  be  divided  among  numerous  trade 
unions.  Hence,  the  two  types  of  unions  are  opposed  to  each 
other.  The  officers  of  the  American  Federation  of  Labor  during 
the  past  few  years  have  repeatedly  criticized  both  the  aims  and 
the  acts  of  the  I.  W.  W.,  and  warned  members  of  trade  unions 
not  to  affiliate  themselves  with  that  organization.  The  I.  W.  Wi 
in  its  battles  with  employers  has  used  a  new  weapon  known  as 
sabotage,  which  may  be  defined  as  a  ^'  strike  on  the  job  "  — 
that  is,  a  strike  without  quitting  work.  This  is  accomplished 
by  disabling  machinery  or  spoiling  tlie  product.  In  either  case 
the  employer  soon  knows  that  he  is  being  fought  by  an  unseen 
foe,  for  seldom  is  the  guilty  individual  ever  caught.  Conse- 
quently, he  must  do  one  of  two  things:  comply  with  the 
deniands  of  his  men  or  get  a  new  labor  force. 

72.   Aims  and  Methods  of  Organized  Labor 

Bargaining  power  of  the  worker.  —  The  more  zealous  advo- 
cates of  the  laissez-faire  doctrine  in  business  have  insisted  that 
the  wage  any  worker  should  receive  ought  to  be  determined  by  a 
bargaining  process  between  the  worker  and  his  employer.  Less 
than  a  century  ago  this  method  prevailed  in  all  industries,  and  it 


314  ELEMENTARY   ECONOMICS 

still  persists  in  fixing  the  wages  of  farm  laborers,  rural  school- 
teachers, and  store  clerks.  Obviously,  the  worker  is  not  on  a 
level  with  his  employer  in  the  matter  of  bargaining.  A  factory 
owner  who  employs  one  hundred  hands  can  usually  get  along 
very  well  if  one  of  the  hundred  should  quit  work ;  also  the  hiring 
of  a  hundred-and-first  man  is  of  no  great  consequence  to  him. 
In  either  case  his  net  income  would  ordinarily  be  affected  but 
slightly.  The  hundred-and-first  man,  however,  has  no  such 
choice.  He  must  find  an  employer.  He  is  likely  to  offer  his 
services  eagerly,  while  the  employer  may  meet  his  advances  with 
indifference.  Hence,  under  such  circumstances,  the  employer, 
if  he  bargains  with  each  of  his  workers  separately,  has  a  decided 
advantage  over  them.  This  significant  fact  laborers  clearly 
recognized  long  before  their  organization  into  unions.  It  is 
not  surprising  then  that  the  chief  aim  of  organized  labor  is  to 
unite  workers  for  the  purpose  of  bargaining  as  one  man.  This 
is  known  as  collective  bargaining.  Under  these  conditions  the 
employer  can  no  longer  regard  the  hiring  of  laborers  with  in- 
difference ;  for  now  instead  of  dealing  with  each  individual 
separately,  he  finds  it  necessary  to  deal  with  the  whole  force 
as  one  man.  Their  refusal  to  work  threatens  his  profits.  This 
group,  therefore,  can  bargain  on  an  equality  with  the  employer. 
Specific  demands  of  organized  labor.  —  Speaking  generally, 
the  demands  of  organized  labor  may  be  grouped  under  three 
heads :  (1)  higher  wages,  (2)  shorter  working  day,  (3)  better 
working  conditions.  Since  there  must  be  some  relation  be- 
tween the  productivity  of  labor  and  the  size  of  its  wage,  the 
question  naturally  arises :  From  what  fund  shall  an  increase  in 
wages  be  paid?  It  may  come  from  what  the  employer  has 
formerly  enjoyed  as  profits,  from  consumers  in  the  form  of  higher 
prices,  or  from  the  laborers  themselves  —  provided  an  increase 
in  wages  increases  efficiency.  Usually,  we  may  safely  assume, 
the  increase  comes  from  the  first  or  second  fund,  probably  a 


THE    LABOR   PROBLEM  315 

portion  from  each  of  them.  The  shortening  of  the  work  day,- 
however,  appears  to  have  been  generally  offset  by  an  increased 
efficiency;  that  is,  a  man  turns  out  as  much  product  in  ten 
hours  as  in  twelve  hours,  owing  to  his  ability  to  increase  his 
hourly  exertion  during  the  shorter  day.  Likewise,  in  many 
occupations  an  eight-hour  day  is  as  good  as  a  ten-hour  day,  and 
in  some  kinds  of  labor  a  working  day  of  seven  or  even  six  hours 
may  be  employed  to  advantage.  The  relation  of  improved 
surroundings  to  output  is  not  so  easily  determined.  Those 
in  a  good  position  to  judge,  however,  claim  that  in  many  cases, 
perhaps  in  most,  employers  are  compensated  in  the  long  run  for 
their  expenditures  in  this  direction. 

Open  and  closed  shops.  —  Less  important,  largely  because 
it  is  less  widespread,  is  the  demand  of  organized  labor  for  the 
closed  shop.  The  closed  shop  is  one  in  which  only  union  laborers 
are  employed,  while  in  an  open  shop  membership  in  a 
union  is  not  required.  Obviously,  organized  labor  prefers  the 
former  kind  of  shop,  but  often  circumstances  are  such  as  to 
force  it  to  permit  its  members  to  work  alongside  what  union  men 
call  "  scabs."  Occasionally,  employers  will  not  hire  union  men 
under  any  circumstance.  Thus  in  reality  there  are  three  kinds 
of  shops  :  open,  closed,  and  nonunion.  Closely  related  to  the 
question  of  open  and  closed  shops  is  the  question  of  open  and 
closed  unions.  Some  unions  are  closed ;  that  is,  the  difficulty 
of  gaining  admission,  because  of  the  long  apprenticeship  required 
or  because  of  the  high  entrance  fee  charged,  is  so  great  as  to  give 
its  members  a  virtual  monopoly  of  their  trade.  Others  are 
said  to  be  open.  Almost  any  one  can  on  the  payment  of  a 
nominal  fee  become  a  member.  Many  authorities  believe 
that  here  lies  the  solution  of  the  problem  of  organized  labor, 
since  the  ends  of  both  employer  and  employee,  they  contend, 
would  be  gained  by  making  all  shops  closed  and  all  unions 
open. 


316  ELEMENTARY   ECONOMICS 

Methods  employed  to  force  the  demands  of  labor.  —  The 
chief  weapon  employed  by  organized  labor  to  get  higher  wages, 
shorter  working  hours,  and  better  surroundings  has  been,  and 
is  now,  the  strike.  To  strike  means  to  quit  work  in  a  body. 
No  other  method  has  been  found  to  be  so  efifective,  since  the 
employer  as  well  as  his  striking  employees  feels  the  evil  effects 
of  idleness.  Usually  strikers  have  the  moral  support  of  the 
general  public)  which  may  be  secured  and  retained  by  advancing 
moderate  demands  and  by  abstaining  from  violence.  -Often  in 
spite  of  the  exercise  of  due  care,  individual  strikers,  and  even 
groups,  breaking  away  from  restraint,  hurt  the  cause  by  com- 
mitting acts  of  lawlessness.  Especially  is  this  likely  to  happen 
when  the  employer  attempts  to  continue  his  business  operation 
by  employing  nonunion  laborers,  known  in  union  circles  as 
"  scabs."  Sometimes  these  nonunion  men  are  bona  fide 
workers;  sometimes  they  are  strike-breakers,  who  follow  the 
dangerous  calling  of  filling  temporarily  the  place  of  men  on  a 
strike,  irrespective  of  the  nature  of  the  work.  They  run  great 
risks  and  are  paid  high  wages.  When  unemployed  they  usually 
loaf  in  low-class  saloons,  ready  at  a  moment's  notice  to  assist 
in  breaking  a  strike  if  the  employer  is  willing  to  pay  their  price. 

The  claim  is  frequently  made  that  the  loss  of  wages  caused  by 
strikes  is  greater  than  the  increases  gained  by  the  strikers  that 
win.  This  claim,  while  it  has  some  foundation,  is  exaggerated. 
From  the  best  available  data  on  strikes  and  their  cost,  we  are 
justified  in  concluding  that  the  per  capita  annual  cost  of  strikes 
in  this  country  during  the  past  generation,  if  spread  over  all 
employees,  is  small ;  also  that  if  the  cost  be  confined  to  organized 
labor  it  is  not  prohibitive  or  even  excessive.  To  say  that 
strikers  have  lost  a  billion  dollars  in  wages  since  1880,  is  esti- 
mating the  cost  in  one  way ;  to  say  that  the  per  capita  annual 
cost  to  all  employees  is  one  dollar,  is  estimating  it  in  another 
way.     The  leading  authority  on  English  labor  history  asserts 


THE    LABOR  PROBLEM 


317 


318  ELEMENTARY   ECONOMICS 

that  the  annual  strike  loss  sustained  by  English  employees  is 
not  greater  than  the  loss  caused  by  an  extra  half-holiday  each 
year ;  that  is,  that  the  loss  sustained  by  each  English  laborer 
is  equal  to  a  half  day's  wages.  Dissatisfied  employees  may  also 
resort  to  the  boycott,  which  simply  means  that  they,  assisted  by 
their  friends  and  sympathizers,  refuse  to  buy  goods  of  the 
employers  against  whom  they  have  a  grievance. 

Public  opinion  and  the  strike.  —  Both  employers  and  labor 
leaders  recognize  the  importance  of  securing  the  moral  support 
of  the  general  public,  for  the  side  which  secures  it  almost  always 
wins.  The  public,  however,  usually  has  little  concern  in  a 
strike  unless  it  is  directly  affected.  The  machinists  on  a  well- 
known  railroad  went  on  a  strike  a  few  years  ago  and  remained 
out  for  several  years.  Few  people  gave  it  any  attention.  Even 
those  residing  in  the  same  city  where  the  shops  of  the  road  were 
located  scarcely  noticed  it.  While  the  strike  of  the  machinists 
was  dragging  itself  out,  the  street-car  men  of  the  same  city  quit 
work  because  their  demands  for  higher  wages  had  been  refused. 
Within  an  hour  the  whole  city  was  aroused.  Meetings  of 
prominent  citizens  were  called.  Committees  were  appointed 
to  try  to  arbitrate  the  differences  between  the  car  company  and 
its  striking  employees.  Even  the  mayor  brought  the  influence 
of  his  office  to  bear  on  the  struggle.  Within  twenty-four  hours 
the  matter  was, settled,  the  strikers  getting  the  wage  increases 
which  they  had  demanded.  We  may  ask  why  the  people  took 
such  an  active  interest  in  one  strike  and  practically  none  what- 
ever in  the  other.  One  compelled  them  to  walk  to  their  work ; 
the  other,  as  far  as  they  could  see,  did  not  concern  them.  In 
one,  the  people  sympathized  with  the  strikers;  in  the  other, 
their  sympathies  were  not  enlisted. 

Employers'  weapons.  —  It  would  be  a  mistake  to  suppose 
that  the  employer  is  defenseless  against  his  striking  employees 
First,  there  are  various  employers'  associations,  such  as  the 


THE    LABOR   PROBLEM  319 

American  Manufacturers  Association,  organized  among  other 
purposes  for  mutual  protection  against  the  demands  of  labor. 
Second,  an  employer  may,  if  his  property  is  threatened  with 
injury,  call  on  the  courts  for  protection.  If  the  court  acts 
favorably,  the  presiding  judge  issues  an  injunction  against  the 
striking  employees,  which  in  the  past  has  proved  to  be  an 
effective  weapon  against  labor.  Violation  of  an  injunction  is 
contempt  of  court,  punishable  by  fine  or  imprisonment  or 
both  at  the  discretion  of  the  judge  issuing  the  decree.  Conse- 
quently, organized  labor  regards  the  injunction  as  dangerous 
to  the  best  interests  of  the  workers,  and  urges  at  every  oppor- 
tunity the  passage  of  laws  that  will  take  such  broad  powers  out 
of  the  hands  of  judges.  Finally,  the  employer  has  the  support 
and  protection  of  the  state,  which  guarantees  to  each  one  the 
right  to  carry  on  his  business  as  he  sees  fit,  as  long  as  he  keeps 
within  reasonable  bounds. 

73.   Methods  of  Settling  Labor  Disputes 

Conciliation.  —  A  variety  of  methods  for  settling  labor  dis- 
putes has  grown  up  in  this  country.  One  of  these  is  known  as 
conciliation.  Usually  neither  party  to  a  labor  dispute  can  see 
the  merits  of  the  other's  claims.  Oftentimes  a  third  party, 
either  an  individual  or  some  government  agency,  can,  by  talking 
with  the  strikers  and  then  with  the  employer,  remove  many  of 
the  differences  separating  them.  In  other  words,  the  conciliator 
merely  tries  to  bring  the  two  disputing  parties  to  a  mutual 
understanding  of  the  issues  involved.  Conciliation  implies 
persuasion,  not  force.     It  means  investigation,  not  award. 

Voluntary  arbitration.  —  As  soon  as  the  employer  and  his 
striking  employees  are  agreed  to  try  to  settle  their  differences 
peacefully  they  are  ready  for  arbitration.  The  usual  practice 
in  this  country  has  been  for  each  side  to  select  an  equal  number 
of  arbitrators,  the  arbitrators  themselves  selecting  another  so  as 


320  ELEMENTARY   ECONOMICS 

to  avoid  the  possibility  of  a  tie  vote.  Each' side  then  presents 
its  case.  The  strikers  explain  their  grievances,  and  submit  as 
much  proof  as.  possible  in  an  effort  to  prove  that  the  employer 
ought  to  remove  their  cause.  If  the  question  of  wages  is  the 
cause  of  the  strike,  the  men  are  likely  to  argue  not  only  that 
they  are  entitled  to  a  raise  because  business  conditions  will 


Copyright  Underwood  &  Underwood,  New  York 

An  Arbitration  Board. 

permit  it,  but  also  that  their  present  wage  is  inadequate  to 
support  their  families  properly.  The  usual  contention  of  the 
employer  is  that  any  increase  in  wages  will  ruin  his  business. 
The  arbitrators  soon  learn,  if  indeed  they  do  not  know  already, 
that  the  claim  of  each  party  is  likely  to  be  greater  than  its 
expectation.  This  is  but  natural  since  arbitration  means  com- 
promise. It  is  their  business  then  to  sift  all  the  evidence  offered 
and  even  to  make  investigations  of  their  own.     Finally,  they 


THE   LABOR   PROBLEM  321 

render  a  decision,  which  ordinarily  both  sides  accept  in  good 
faith.  Occasionally,  however,  one  or  the  other  party  to  the 
agreement,  becoming  dissatisfied  with  the  award,  finds  a  pretext 
for  undoing  all  that  the  arbitrators  have  done. 

Compulsory  arbitration.  —  In  some  countries,  particularly 
New  Zealand  and  Australia,  arbitration  of  labor  disputes  is  a 
government  matter.  There  the  state  steps  in  when  troubles 
arise,  and  compels  the  employer  and  his  employees  to  submit* 
their  differences  for  settlement  to  the  proper  public  officials. 
Under  these  conditions  strikes  seldom  occur.  Nothing  so 
strict  has  been  attempted  in  the  United  States.  Here  both 
employer  and  employees  are  inclined  to  resent  any  interference 
on  the  part  of  the  government  in  what  they  call  their  "  private 
affairs."  Some  of  the  states  have  adopted  partial  measures  by 
providing  permanent  arbitration  boards  to  serve  if  mutually 
agreeable  to  both  the  employer  and  his  striking  workmen. 
No  board,  however,  has  power  to  compel  either  party  to  the 
dispute  to  submit  its  differences.  In  other  words,  it  can  usually 
do  little  more  than  passively  look  on  unless  called  in  by  both 
sides.  Whether  or  not  we  shall  ever  go  as  far  as  New  Zealand  or 
Australia  has  gone  in  the  matter  of  compelling  the  arbitration  of 
labor  troubles  is  a  mooted  question.  Just  now  the  employers 
regard  this  extremity  much  more  favorably  than  do  employees ; 
and  naturally  so,  for  the  last  few  years  has  seen  a  remarkable 
growth  in  the  strength  and  solidarity  of  organized  labor.     , 

74.   Labor  Legislation 

Need  for  labor  legislation.  —  Up  until  a  century  ago  prac- 
tically all  labor  legislation  favored  the  employing  classes.  The 
evils  growing  out  of  the  English  ihdustrial  revolution,  however, 
forced  Parliament  to  give  attention  to  legislating  for  employees, 
particularly  for  women  and  children.  Gradually  there  grew 
up  in  England  a  system  of  labor  laws  that  had  for  their  end  the 


322  ELEMENTARY   ECONOMICS 

regulation  of  hours  and  conditions  of  work.  Women,  for 
example,  were  forbidden  to  work  in  mines,  while  the  employ- 
ment of  children  under  a  certain  age  was  prohibited.  The 
influence  of  organized  labor  in  that  country,  aided  by  a  com- 
mendable spirit  among  the  governing  classes,  has  done  much 
during  the  past  century  to  make  English  labor  laws  the  best  in 
the  world.  It  was  not  until  much  later  that  the  lawmakers  of 
this  country  took  up  seriously  the  question  of  labor  legislation. 
Massachusetts  was  the  first  state  to  make  a  thorough  investiga- 
tion of  labor  conditions,  upon  which  some  excellent  laws  were 
later  based.  Other  states  followed  the  lead  of  Massachusetts 
until  now  all  of  them  have  done  something  in  the  way  of 
regulating  conditions  of  labor  within  their  respective  juris- 
dictions. Here,  as  in  England,  chief  attention  has  been  given  to 
women  and  children.  Neither  of  these  classes  is  as  competent 
as  men  to  protect  its  own  interests.  Neither  is  as  physically 
strong.  Neither  is  organized  so  well.  Moreover,  the  well- 
being  of  the  next  generation  depends  on  the  strength  and  vigor 
of  the  women  and  children  of  this  generation. 

Obstacles  to  labor  legislation  in  the  United  States.  —  Legis- 
lation for  the  protection  of  workers  in  this  country  has  encoun- 
tered several  obstacles,  three  of  which  deserve  notice  in  this 
connection.  First,  the  typical  American  has  always  strongly  in- 
sisted on  the  right  to  pursue  his  own  economic  course  without 
the  interference  of  government  agencies.  Even  when  he  found 
himself  at  a  disadvantage,  he  was  enough  of  a  fighter  to  want  to 
stand  on  his  own  feet.  Second,  the  great  number  of  lawmaking 
bodies  in  this  country  (Congress  and  forty-eight  state  legis- 
latures) makes  uniform  legislation  impossible.  Consequently, 
each  state  legislature  hesitates  to  enact  any  labor  law  that 
might  drive  industry  into  some  other  state.  A  state  law,  for 
example,  which  would  set  the  age  limit  of  children  permitted 
to  work  in  cotton  factories  at  a  higher  point  than  some  neighbor- 


THE    LABOR   PROBLEM  323 

ing  state  had  set  it,  would  run  the  risk  of  losing  some  of  its 
cotton  factories.  Third,  the  courts  of  this  country,  both  state 
and  federal,  have  declared  many  labor  laws  to  be  null  on  the 
ground  that  they  were  contrary  to  the  Constitution  of  the 
United  States  or  to  the  constitution  of  the  state  to  which  they 
applied.  As  a  result,  the  will  of  the  people  has  been  thwarted, 
unconsciously  to  be  sure,  by  constitutions  drawn  before  the 
need  for  labor  legislation  had  arisen. 

Character  of  labor  legislation  in  the  United  States.  —  In 
spite  of  these  obstacles,  the  national  government  and  the 
various  states  have  enacted  a  great  many  labor  laws.  In  many 
of  the  states  women  and  children  are  fairly  well  protected,  not 
only  against  unscrupulous  employers,  but  also,  strange  as  it 
may  seem  at  first,  against  themselves.  'In  passing  on  these  laws, 
however,  the  courts  have  often  been  compelled  to  shut  their 
eyes  to  the  Constitution  of  the  United  States,  which  guarantees 
the  right  of  every  citizen  to  make  contracts.  In  the  case  of  men 
they  have  not  been  so  lenient.  In  fact,  except  in  the  most 
extreme  cases,  or  where  the  public  interest  was  directly  in- 
volved, the  courts  have  usually  declared  those  laws  to  be  un- 
constitutional which  restrict  the  rights  of  adult  males  to  enter 
into  whatever  labor  contracts  they  please.  Yet  it  seems  safe 
to  say  that  the  trend  of  the  times  is  toward  restrictive  labor 
legislation  for  men,  for  it  is  practically  impossible  to  separate 
the  welfare  of  the  individual  from  the  welfare  of  society.  Hence 
we  have  laws  abolishing  the  manufacture  of  certain  kinds  of 
matches ;  others  regulating  hours  of  labor  in  deep  mines ;  and 
still  others,  restricting  the  number  of  hours  railroad  crews 
may  work. 

75.   Foreign  Immigration 

Immigration  and  labor.  —  Immigration,  since  it  affects  wages 
and  standards  of  living,  is  essentially  one  of  the  aspects  of  the 
labor  problem.     Since  the  organization  of  our  government  in 


324 


ELEMENTARY   ECONOMICS 


1789  approximately  thirty  million  foreigners  have  come  to  the 
United  States.  Practically  every  adult  member  of  this  vast 
army  became  a  wage-earner  as  soon  as  he  arrived,  competing 
directly  or  indirectly  with  the  wage-earners  who  were  already 
here.  Until  a  generation  ago  most  of  the  immigrants  came  from 
northwestern  Europe,  chiefly  from  Great  Britain,  Ireland,  Ger- 
many, and  the  Scandinavian  countries.  .Just  as  this  flow  of 
human  life  to  the  new  world  slackened,  another  from  southern 

Foreign  Immigration  into  the  United  States:   1890-1918. 


1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 
1907 
1908 
1909 
1910 
1911 
1912 
1913 
1914 
1915 
1916 
1917 
1918 

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000  000 

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and  central  Europe  began,  and  continued  with  increasing 
volume  until  the  outbreak  of  the  Great  War.  This  we  call  the 
"  newer  immigration."  Its  chief  source  was  southern  Italy, 
Greece,  Austria-Hungary,  and  Russia. 

Economic  aspects  of  the  newer  immigration.  —  The  newer 
immigration,  as  contrasted  with  the  older  one,  has  several 
important  characteristics.  First,  its  members  are  unskilled, 
without  funds,  and  highly  illiterate.  Consequently,  they  have 
for  the  most  part  congregated  in  the  cities  and  about  coal  mines. 


THE    LABOR   PROBLEM 


325 


They  have  filled 
the  lowest  industrial 
positions,  and  often 
worked  for  wages 
much  below  what  a 
native  worker  would 
have  accepted.  Ig- 
norant of  the  laws 
and  customs  of  the 
country  they  have 
suffered  at  the 
hands  of  unscrupu- 
lous employers  and 
* '  bosses, ' '  being  com- 
pelled to  work  long 
hours  under  revolt- 
ing conditions.  Be- 
cause of  these  facts, 
organized  la"bor  looks 
unfavorably  on  un- 
restricted foreign 
immigration.  Labor 
leaders  see  in  it  a 
weapon  which  may 
in  time  be  turned 
against  them  by  the 
employer.  They  see 
also,  they  say,  the 
hopelessness  of  the 
task  of  trying  to 
instill  in  the  mind 
of  the  typical  immi- 
grant from  southern 


Color  or  Race,  Nativity,  and  Parentage, 
BY  States :   1910. 


PER  CENT 


^////A   NATIVE  WHrTE  -  NATIVE  PARENTAGE  Y^^A  FOREIQN-BORN  WHtTE 

NATIVE  WHITE-  FOREIGN  OR  MIXED  PARENTAQE      ^^H  NEGRO  AND  ALL  OTMCS 


326  ELEMENTARY   ECONOMICS 

-Europe  the  importance  of  organization.  This  type  of  immi- 
gration, however,  is  somewhat  of  an  asset  which  we  must  not 
overlook.  It  does  the  "  dirty  "  work  which  Americans  have 
come  to  regard  with  disfavor.  It  furnishes,  without  expense  of 
rearing,  a  vast  labor  force.  And  finally  it  provides  an  annual 
market  for  hundreds  of  millions  of  dollars'  worth  of  products 
turned  out  by  native  American  workmen. 

Social  aspects  of  the  newer  immigration.  —  Much  of  the 
opposition  to  the  newer  immigration  would  not  exist,  we  may 
say  with  assurance,  if  it  were  possible,  as  it  was  with  the  older 
immigration,  for  the  native  stock  to  absorb  it.  The  English, 
Irish,  or  German  immigrant  of  the  earlier  period  was  much  like 
the  people  he  found  here.  All  sprang  from  the  same  general 
stock.  All  had  similar  political  ideals.  The  typical  Italian 
immigrant,  on  the  other  hand,  cannot  adjust  himself  so  easily. 
To  the  average  American  he  is  a  stranger,  inferior  in  every- 
way—  industrially,  socially,  morally.  He  finds  the  door  closed 
to  him  and  his  family.  He  remains  Italian.  What  is  worse, 
his  children  remain  more  or  less  Italian.  In  short,  the  American 
melting  pot  seems  to  have  lost  its  heat.  As  a  result  he  keeps 
with  his  own  kind,  clings  to  his  own  customs,  manners,  and 
language,  and  never  really  becomes  a  part  of  the  broad  current 
of  American  life.  Because  of  his  isolation,  organized  labor  too 
often  regards  him  as  undesirable.  As  it  is  with  the  Italian 
immigrant  so  it  is  with  practically  all  the  immigrants  from  the 
other  countries  of  southern  and  central  Europe. 

EXERCISES  AND   PROBLEMS 
A 

1.  What  three  forces  operated  before  the  Civil  War  to  prevent  the 
organization  of  labor? 

2.  How  did  the  war  itself  affect  these  forces  ? 


THE   LABOR   PROBLEM  '  327 

3/  In  what  essential  respects  do  the  Knights  of  Labor  differ  from 
labor  unions  ?  from  the  American  Federation  of  Labor  ? 

4.  Distinguish  between  a  trade  union  and  a  labor  union. 

5.  Why  are  the  Industrial  Workers  of  the  World  objectionable  as 
an  organization? 

6.  Why   is   "sabotage"    such   an   effective   weapon   against   the 
employer? 

7.  Just  why  is  the  employee  at  a  disadvantage  in  bargaining  ? 

8.  How  does  collective  bargaining  remove  this  disadvantage? 

9.  Explain  how  a  laborer  can  do  more  work  in  eight  hours  than  in 
ten  hours. 

10.  What  are  the  three  specific  demands  of  organized  labor? 

11.  How  effective  is  the  force  of  public  opinion  in  settling  strikes? 

12.  Why  is  the  employment  of  strike-breakers  so  objectionable  both 
to  organized  labor  and  to  the  public  generally  ? 

13.  What  is  the  essential  difference  between  conciliation  and  arbi- 
tration? 

14.  How  does  voluntary  arbitration  differ  from  compulsory  arbi- 
tration ? 

15.  What  obstacles  have  hindered  labor  legislation  in  the  United 
States? 

16.  Why  have  the  courts  distinguished  between  men  and  women  in 
passing  on  the  constitutionality  of  labor  laws  ? 

17.  Why  in  general  does  organized  labor  favor  restrictions  on  foreign 
immigration  ? 

18.  What  is  the  chief  cause  of  the  general  objection  to  the  newer 
immigration  ? 

B 

1.  Consult  with  an  official  of  a  local  union. 

a.  Get  his  viewpoint  on  the  labor  situation  in  general. 

b.  Inquire  about  specific  rules  of  work  enforced  by  his  union. 

c.  Discuss  with  him  the  attitude  of  organized  labor  towards 

socialism. 

d.  Ask  him  about  any  strike  experiences  he  may  have  had. 

2.  Call  to  mind  any  industrial  strike  that  may  have  been  carried 
on  in  your  community. 

a.  Was  the  public  vitally  interested  in  the  strike? 
h.  Were  strike-breakers  imported? 


328  •  ELEMENTARY   ECONOMICS 

c.  Did  the  strikers  picket  the  plant  in  which  they  had  formerly 

been  employed? 

d.  Which  party  to  the  strike  was  the  more  eager  to  arbitrate? 

e.  Did  the  state  make  any  effort  to  settle  the  strike  ? 
.   /.   What  was  the  outcome  of  the  strike? 

3.  From  a  census  report  or  from  some  other  reliable  source  get 
statistics  on  the  number  of  persons  in  your  community  who  are  foreign- 
born  or  who  are  native-born  of  foreign  parentage. 

a.  Which  nationality  shows  the  greatest  strength  ? 

b.  Is  the  parentage  of  "foreigners"  in  your  community  above  or 

below  that  of  the  United  States  ?  your  own  state  ? 

c.  How  many   children   of  foreign-born   parents   attend   your 

school  ? 

4.  Ask  each  student  in  the  class  to  state  the  nationality  of  his 
father,  mother,  both  grandfathers,  and  both  grandmothers. 

a.  How  many  are  "Americans"? 

h.  Are  any  pure  English,  Irish,  German,  or  Scotch? 

c.  How  many  are   descended   from  two  or  more  of    the  four 

stocks  ? 

d.  Formulate  conclusions  as  to  the  mixtures  of  these  old  stocks. 


1.  One  of  the  cardinal  policies  of  trade  unionism  is  that  all  of  the 
members  of  any  union  should,  within  narrow  limits,  receive  the  same 
wage. 

a.  Does  such  a  policy  hinder  the  more  skilled  workers?     How? 
h.  How  do  labor  leaders  justify  this  policy  ? 

c.  What  determines  the  wage  for  such  a  group? 

d.  Why  should  not  the  wage  for  the  same  kind  of  work,  plumbing 

say,  be  the  same  for  the  whole  United  States? 

2.  Organized  labor  is  often  criticized  on  the  ground  that  it  opposes 
the  introduction  of  new  machinery  and  new  processes. 

a.  Is  there  likely  to  be  any  basis  for  this  criticism? 

b.  Would  organized  labor  be  justified  in  taking  such  a  position? 

Explain. 

c.  How  would  such  a  policy  affect  production?  the  wages  of 

organized  labor?  the  wages  of  unorganized  labor? 

d.  What  would  be  your  position  in  the  matter  if  you  were  an 

employer  ?  a  member  of  a  trade  union  ? 


THE  LABOR  PROBLEM  329 

3.  Many  of  the  wisest  labor  laws  enacted  by  Congress  and  the  state 
legislatures  have  been  declared  unconstitutional  by  the  various  courts. 

a.  What  is  meant  by  the  expression  "unconstitutionality"? 

b.  Where  did  the  courts  get  this  power? 

c.  What  procedure  is  necessary  to  make  such  laws  constitutional  ? 

4.  "America  is  a  great  melting  pot  in  which  the  peoples  of  Europe 
are  transformed  into  Americans." 

a.  Explain  what  is  meant  by  "melting  pot." 

b.  How  effective  is  the  melting  process  just  now? 

c.  What  experiences  caused  this  expression  to  be  coined? 

d.  Should  it  be  modified  in  any  respect  ?     Just  how  ? 

SUPPLEMENTARY    READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  468-493. 

Ely,  Outlines  of  Economics,  3d  ed.,  .pages  444-491. 

Fetter,  Economics,  Vol.  II,  pages  281-332. 

Johnson,  Introduction  to  Economics,  pages  173-191. 

Seager,  Principles  of  Economics,  pages  536-579. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  429-447.   -^ 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  II,  pages  261-302. 


CHAPTER  XXIV 

RETURN   TO    LAND    (RENT) 

76.  Nature  and  Source  of  Agricultural  Rent 

Contract  and  economic  rent.  —  The  word  ''  rent  "  is  used  in 
our  everyday  speech  in  a  variety  of  ways.  We  speak  of  renting 
an  automobile,  or  a  team  of  horses,  or  even  a  dress  suit  or  a  pocket 
camera.  Usually  in  such  cases,  the  term  "  hire  "  would  be  more 
applicable  ;  for  it  adds  to  clearness  to  restrict  the  use  of  rent  to 
land,  or  at  most  to  land  and  its  improvements.  Even  then  we 
may  have  two  kinds  of  rent,  contract  (commercial)  and  eco- 
nomic. Contract  rent  is  a  mere  matter  of  agreement  between  two 
parties,  and  it  may  or  may  not  be  equal  in  amount  to  economic 
rent.  If  I  agree  to  pay  Mr.  X  $100  a  year  for  the  use  of  his  ten 
acres  of  land,  the  $100  is  contract  rent  irrespective  of  the  lo- 
cation or  fertility  of  the  ten  acres.  The  principle  developed 
in  the  discussion  of  market  price  applies  in  the  matter  of  con- 
tract rent.  The  landowner,  like  the  seller  of  goods,  has  a 
minimum  rental  value  in  his  mind,  while  the  prospective 
renter  has  a  maximum  value ;  each  bases  his  estimate  on  what 
he  believes  is  the  economic  rent  of  the  piece  of  land  under  con- 
sideration. As  a  result  contract  rent  tends,  in  actual  practice, 
to  approximate  economic  rent. 

Source  of  agricultural  economic  rent.  —  Economic  rent,  un- 
like contract  rent,  cannot  be  determined  by  bargaining.  Nor 
is  it  necessary  that  a  piece  of  land  be  rented  to  a  tenant  'in  order 
that  its  economic  rent  may  appear.     The  owner  of  a  farm  re- 

330 


RETURN   TO   LAND    (RENT)  331 

ceives  economic  rent  just  as  truly  when  he  himself  operates  it 
as  when  he  permits  a  tenant  to  operate  it. 

The  simplest  approach  to  an  understanding  of  economic  rent 
is  made  by  examining  an  ideal  situation  in  which  only  a  few 
persons  are  concerned.  Let  us  assume,  therefore,  that  ten 
families  take  up  their  residence  on  an  isolated  island  composed, 
let  us  say  first,  of  several  different  kinds  of  soil.  Let  us  assume 
also  that  one  of  the  famiUes  engages  in  wheat-farming  on  the  land 
best  adapted  to  wheat,  while  the  other  nine  engage  in  fishing, 
manufacturing,  or  commerce,  or  even  in  some  other  kind  of 
farming.  Obviously,  the  wheat  farmer  can  raise  wheat 
cheaper  than  any  other  one  —  say  80  cents  a  bushel  —  for  he  has 
the  best  wheat  land.  As  the  number  of  people  on  the  island 
increases,  more  wheat  will  be  necessary  and  consequently  more 
wheat  land  will  need  to  be  brought  under  cultivation.  Neces- 
sarily the  farmers  that  take  up  wheat-raising  must  resort  to  a 
poorer  grade  of  wheat  land  than  the  first  farmer  possesses. 
But  they  will  not  grow  wheat  even  on  free  land  unless  the  price 
of  wheat  is  high  enough  to  return  to  them  interest  on  their 
capital  and  wages  for  their  labor.  We  may  expect  under  the 
increased  demand  for  wheat  that  the  price  will  rise,  say  to  $L00 
a  bushel.  Under  these  new  conditions  the  first  wheat  farmer, 
without  having  his  expenses  increased,  will  enjoy  the  increased 
price  of  20  cents  a  bushel.  If  his  land  produces  40  bushels  per 
acre  it  yields  him  an  economic  rent  of  $8  (40  times  20  cents) 
per  acre.  As  population  continues  to  increase,  the  extra  de- 
inand  for  wheat  forces  its  price  upward.  Farmers  will  then 
resort  to  the  cultivation  of  poorer  wheat  lands,  with  the  result 
that  our  first  wheat  farmer,  also  all  the  others  except  the  one 
on  the  poorest  piece  of  wheat  land,  will  get  an  additional  in- 
come which  we  call  economic  rent.  We  may  say,  therefore, 
that  one  of  the  sources  of  economic  rent  is  the  differences  that 
exist  in  the  fertility  of  soil. 


332  ELEMENTARY   ECONOMICS 

We  might  have  assumed  that  all  of  the  land  on  our  islands 
was  of  the  same  fertility.  Suppose  that  nine  of  the  ten  families 
settle  in  a  village,  while  the  tenth  family  takes  up  the  nearest 
piece  of  land  for  wheat-farming.  Here  again  an  increase  in 
population  will  increase  the  demand  for  wheat  with  a  corre- 
sponding increase  in  price.  Consequently,  other  families  will 
take  up  land  for  the  purpose  of  growing  wheat.  This  land, 
according  to  our  assumption,  is  as  well  adapted  to  wheat-raising 
as  the  first  farmer's  land,  hut  not  so  well  located  in  reference  to  the 
village  market.  The  second  farmer,  therefore,  will  be  compelled 
to  undergo  transportation  expenses  from  which  the  first  wheat 
farmer  is  free.  Since  the  price  of  wheat  is  uniform  in  the  village 
market,  the  first  farmer  will  enjoy  an  advantage  over  the  second 
farmer.  Here  is  a  second  source  of  economic  rent.  A  complete 
explanation  of  the  sources  of  economic  rent  is  beyond  the  scope 
of  this  book.  We  may  say,  however,  that  economic  rent  arises 
from  differences;  in  agriculture  it  arises  chiefly  from  differences 
due  to  fertility  and  location. 

No-rent  land.  —  We  may  assume,  to  continue  our  island  illus- 
tration, that  the  ten  families  compete  among  themselves  for  the 
one  fertile  piece  of  wheat  land  to  the  point  where  the  family 
which  secures  it  merely  gets  return  for  the  labor  and  capital 
employed  in  its  cultivation.  Under  these  circumstances  this 
land,  though  it  was  the  most  fertile  or  the  best  located  piece  on 
the  island,  is  no-rent  land ;  that  is,  it  yields  no  rent  either  to 
its  owner  or  to  its  cultivator.  In  Fig.  9  we  see  graphically  the 
effect  of  increasing  demands  for  wheat  in  our  island  settlement. 
When  the  settlement  was  first  made  the  price  of  wheat  was  OL 
per  bushel  while  the  cost  of  raising  it  (interest  and  wages)  was 
the  same ;  that  is,  it  was  produced  on  no-rent  land.  Just  as 
soon,  however,  as  an  increased  demand  for  wheat  compelled  the 
utilization  of  a  poorer  piece  of  land  (poorer  either  in  fertility  or 
in  location)  for  wheat-growing,  the  price  per  bushel  was  neces- 


RETURN   TO   LAND    (RENT) 


333 


sarily  raised.  Otherwise,  no  one  could  afford  to  raise  wheat  on 
a  poorer  piece  of  land,  for  the  cultivator  of  the  best  piece  was 
merely  getting  a  normal  return  on  his  capital  and  labor.  The 
rise  in  price  per  bushel  gave  the  wheat-grower  on  the  best  piece 
of  land  a  surplus  over  his  outlay  in  the  form  of  wages  and  in- 
terest. This  surplus  we  call  economic  rent.  Its  size  is  de- 
termined by  the  difference  between  his  capital  and  labor  costs 


y 

Q 
p 

0 

G         H 

I         J 

/ 

!         I     • 

1         '     ' 

1       1            ^ 
1       \^^^'^ 

N 

M 

L 

^^ 

i 

>       A 

1 

f    c 

1             L 

)         I 

i                                  X 

Fig.  9. 

and  the  capital  and  labor  costs  of  the  second  cultivator,  who 
utilizes  no-rent  land.  Let  us  suppose,  further,  that  an  increase 
in  population  causes  five  other  pieces  of  land  to  be  utilized  at 
varying  costs  in  the  way  of  interest  and  wages  (represented  by 
the  solid  vertical  Unes  A,  B,  C,  D,  and  E).  Clearly,  the  price 
per  bushel  would  have  to  be  fixed  at  not  less  than  E.  Then 
the  surplus  per  bushel  (economic  rent)  going  to  our  first  farm 


334  ELEMENTARY   ECONOMICS 

would  be  LQ ;  to  the  next  best  piece,  G  (MQ) ;  to  the  third, 
H  (NQ) ;  to  the  fourth,  I  (OQ) ;  and  to  the  fifth,  J  (PQ). 

Usually  we  think  of  differences  in  yield  per  acre  rather  than 
differences  in  the  capital  and  labor  costs  per  bushel.  Let  us 
suppose  that  five  cultivators,  each  using  exactly  the  same 
amount  of  labor  and  capital  on  equal-sized  pieces  of  land,  pro- 
duce the  following  numbers  of  bushels  per  acre  :  40,  32,  30,  25, 
and  20.  Since  the  fifth  man  will  not  farm  without  getting  a 
return  for  his  interest  and  wages,  we  may  conclude  that  twenty 
bushels  of  wheat  per  acre  equals  in  value  the  outlay  of  each 
farmer.  Hence  the  economic  rent  of  the  five  pieces,  measured 
in  bushels,  is  20  (40-20),  12  (32-20),  10  (30-20),  5  (25-20), 
and  0  (20-20). 

77.  Urban  Rents 

Different  kinds  of  urban  sites.  —  We  are  now  prepared  to 
extend  to  urban  rents,  with  some  modification,  the  principles 
we  have  just  learned.  Obviously,  fertility  is  not  a  factor  in 
determining  the  selection  of  an  urban  site.  Hence,  location 
alone  will  claim  our  attention  in.  this  discussion.  Urban  sites 
might  be  divided  into  an  infinitely  large  number  of  groups,  but 
for  our  purpose  two  will  suffice :  residence  sites  and  business 
sites.  It  is  a  matter  of  common  knowledge  that  some  store 
sites  more  than  others  are  desired  by  merchants.  Usually  the 
determining  factor  in  retailing  is  the  size  of  the  crowds  that  pass 
certain  points  during  the  day.  A  department-store  owner  has 
the  option  of  utilizing  a  site  near  a  busy  down-town  comer,  or 
he  may  locate  his  stock  of  goods  somewhere  in  the  residence 
district,  or  even  out  in  the  desert,  where  land  is  free  for  the 
asking.  We  may  say  at  once  that  if  he  is  a  wise  merchant  he 
will  not  try  to  operate  his  store  in  the  residence  district,  cer- 
tainly not  in  a  desert.  Here  we  have  the  principle  of  site  rent. 
The  down-town  business  lot,  like  our  best  located  farm  on  the 


RETURN   TO   LAND    (RENT)  335 

island,  enjoys  the  best  location.  For  that  reason  it  yields 
economic  rent.  Superior  urban  sites,  like  agricultural  lands 
above  no-rent  land,  yield  economic  rent  though  the  owners  them- 
selves utiUze  them.  If  the  owner  and  the  utilizer  are  different 
persons,  the  economic  rent  takes  the  form  of  contract  rent. 
Otherwise  it  becomes  a  part  of  the  utiUzer's  total  income. 

The  unearned  increment.  —  Closely  associated  with  economic 
rent  is  what  is  commonly  called  the  unearned  increment,  which 
means  the  added  value  given  to  land  by  society  and  not  by  land- 
owners as  such.  For  the  sake  of  clearness  we  may  confine  our 
attention  to  urban  sites,  for  it  is  there  that  social  forces  have 
had  the  greatest  influence  in  raising  land  values. 

Our  discussion  of  urban  rents  has  paved  the  way  for  the  state- 
ment that  retail-store  sites  are  determined  largely  by  the  habits 
of  the  consuming  public.  One  block  is  better  than  another  for 
certain  kinds  of  retailing.  Just  why  it  is  better  is  a  matter  to 
be  determined  in  every  individual  case :  perhaps  it  is  the 
location  of  the  courthouse,  or  of  the  post  office,  or  of  a  popular 
theater.  Whatever  the  reasons  —  important  as  they  are  in 
actual  business  practices  —  we  need  only  to  remember  that 
equal-sized  business  sites  produce  unequal  amounts  of  eco- 
nomic rent,  and  that  these  inequalities  rest  largely  on  forces 
usually  independent  of  the  owners  of  the  sites.  Twenty  years 
ago,  to  cite  an  example,  an  eastern  capitalist  acquired  a  vacant 
business  lot  in  the  city  of  Denver  for  $10,000.  In  the  mean- 
time his  taxes  and  loss  of  interest  on  his  investment  totaled 
$17,000.  Recently  he  sold  the  lot  for  $100,000,  reahzing  over 
and  above  its  entire  cost  to  him  the  sum  of  $73,000.  Not  once 
in  the  twenty  years  did  the  capitalist  visit  Denver.  Nor  was 
it  owing  to  any  influence  of  his  that  the  city  grew,  and  that  the 
people  there  acquired  the  habit  of  passing  his  vacant  lot  in 
great  numbers.  Yet  without  effort,  and  even  without  any  show 
of  foresight,  for  he  had  reluctantly  taken  the  lot  on  an  old  debt, 


336 


ELEMENTARY   ECONOMICS 


Different  Utilization  of  Similar  Pieces  of  Land. 
How  did  the  erection  of  this  hotel  afifect  the  value  of  adjacent  sites  ? 


RETURN   TO   LAND    (RENT) 


337 


he  gained  a  small  fortune.  As  one  of  his  friends  expressed  it, 
he  reaped  where  he  did  not  sow.  Single-taxers  argue  that  all 
such  increases  in  value  should  go  to  society  and  not  to  in- 
dividuals. These  arguments  are  best  expressed  by  the  single- 
taxers  themselves  in  a  well-known  pamphlet  entitled  A  Single- 


No  Man's  Land. 

In  almost  every  city  is  to  be  found  a  fringe  of  sites  around  the  business 
center  undesirable  either  for  stores  or  for  residences. 


Tax  Catechism.     The  following  three  questions  and  answers 
indicate  the  nature  of  the  catechism : 


Q.    What  is  meant  by  the  Single  Tax? 

A.  The  payment  of  all  public  expenses  from  ground  rent,  the  nor- 
m::l  revenue,  thus  eventually  abolishing  all  taxes. 

Q.     What  is  the  ethical  basis  of  the  Single  Tax? 

A.  The  common  riglit  of  all  citizens  to  profit  by  site  values  of  land 
which  are  a  creation  of  the  community. 

Q.    What  is  meant  by  the  site  value  of  land? 

A.    The  market  value  of  situation  irrespective  of  improvements. 


338  ELEMENTARY   ECONOMICS 

Any  discussion  of  the  unearned  increment  is  incomplete  with- 
out some  mention  of  a  contrary  movement  known  as  the  un- 
earned decrement.  This  concept  can  best  be  explained  by 
reference  to  another  concrete  example.  Several  years  ago  a 
group  of  men  built  an  apartment  house  in  the  city  of  Chicago 
on  land  then  valued  at  $30,000.  At  that  time  the  neighborhood 
was  one  of  the  best  in  the  city.  Shortly  afterward  several 
small  store  buildings  were  built  near  by.  Then  the  elevated 
railroad  was  built  down  the  middle  of  the  street,  and  finally 
one  of  the  large  department  stores  built  a  warehouse  on  an 
adjoining  lot.  Desirable  tenants  could  no  longer  be  secured. 
The  apartments  were  necessarily  let  to  lower-income  classes. 
The  result  was  that  the  value  of  the  ground  declined  from 
$30,000  to  $15,000.  Here  was  a  loss  inflicted  on  a  small  group 
of  individuals  by  other  individuals  and  by  society  at  large. 
While  no  one  believes  that  in  the  typical  American  city  the 
decrement  equals  t^e  increment,  the  fact  must  not  be  forgotten 
that  a  portion  of  the  increment  is  offset  by  a  decrement. 

78.   Economic  Rent  and  Price 

Economic  rent  does  not  enter  into  price.  —  The  usual  notion 
is  that  economic  rent  is  one  of  the  factors  in  setting  price.  This 
notion,  however,  is  incorrect.  Economic  rent  does  not  deter- 
mine price ;  rather  price  is  the  chief  factor  in  determining 
economic  rent.  It  will  be  remembered  that  our  island  farmer 
who  cultivated  the  best  soil  enjoyed  a  constantly  increasing 
economic  rent  as  the  increasing  demand  for  wheat  forced  the 
price  upward.  We  assumed  that  his  economic  rent  was  twenty 
bushels  of  wheat  per  acre.  Had  his  economic  rent  been  thirty 
bushels  instead  of  twenty  it  is  not  like'y  that  the  price  of  wheat 
would  have  been  materially  affected,  for,  as  we  have  seen,  the 
demand  for  wheat  caused  the  price  to  be  set  at  a  point  which 
would  permit  of  the  cultivation  of  the  no-rent  piece  of  land. 


RETURN   TO   LAND    (RENT)  339 

When  contract  rent  equals  economic  rent  —  the  two  always 
tend  to  approximate  —  the  former  likewise  does  not  enter  into 
price.  Hence  the  retail  store  utilizing  the  best  site  can  sell  as 
cheaply,  all  other  things  being  equal,  as  its  competitor  on  a 
poorer  location.  It  is  a  well-known  fact  that  one  of  the  large 
variety-store  companies  will  not  locate  in  a  city  unless  it  can 
secure  a  relatively  high-rent  site.  Similarly,  the  high  contract 
rents  paid  by  tenants  on  the  rich  soil  of  Iowa  or  Illinois  do  not 
affect  the  prices  of  their  products. 

Economic  rent  and  agricultural  values.  —  Those  accustomed 
to  buy  and  sell  farm  lands  determine  land  values  by  fertility, 
location,  and  height  of  interest  rate.  Their  first  consideration 
is  to  ascertain  the  average  yield  of  the  piece  of  land  they  are 
trying  to  buy.  Obviously,  the  more  fertile  the  land  the  greater 
the  yield.  But  this  is  not  the  only  consideration.  They  must 
also  estimate  the  cost  of  getting  its  product  to  market.  An 
acre  of  com  land  ten  miles  from  an  elevator,  other  things  being 
equal,  is  less  valuable  than  an  acre  nearer  at  hand.  For  in  both 
cases  the  item  of  transportation  cost  must  be  taken  into  account. 
Finally,  the  value  of  a  piece  of  land,  or  if  we  prefer,  the  value  of 
its  economic  rent,  depends  also  on  the  normal  interest  rate,  for 
as  the  interest  rate  declines  land  values  rise.  Thus,  a  farm 
which  would  be  considered  to  be  worth  $20,000  when  the  normal 
interest  rate  is  5  per  cent,  would  be  worth  $25,000  if  the  interest 
rate  should  drop  to  4  per  cent.  The  methods  employed  to 
determine  the  value  of  a  piece  of  unimproved  land  may  be 
explained  by  the  simple  device  as  shown  on  page  340. 
First  the  economic  rent  is  determined.  Divide  the  rent  by  the 
normal  rate  of  interest.     The  quotient  is  the  value  of  the  land. 

Economic  rent  and  urban  values.  —  Compared  with  agri- 
cultural lands  the  process  of  determining  the  value  of  urban 
sites  is  usually  a  more  difficult  matter.  Farm  products  are 
tangible,  easily  measured,  and  have  a  well-known  market  price. 


340 


ELEMENTARY   ECONOMICS 


Likewise  the  skill  and  ability  ordinarily  required  to  conduct 
farming  operations  are  widely  scattered  among  many  persons. 
In  the  retail  business,  for  example,  the  situation  is  different. 
The  prospective  buyer  of  a  business  site  may  feel  safe  in  some 
cases  in  merely  capitalizing  the  economic  rent  as  represented 

Physical 
Property 


Capital 
Value 


Rent 


Interest  Rate 

FiQ.  10. 

by  the  contract  rent  of  the  tenant.  More  often  he  would 
exercise  greater  care  in  arriving  at  the  value  of  the  site  imder 
consideration.  In  other  words,  even  where  a  business  site  has 
enjoyed  a  uniform  rent  for  years,  the  determination  of  its  value 
is  a  "  hazardous  occupation." 


RETURN   TO   LAND    (RENT)  341 

Determination  of  the  value  of  residence  sites  is  still  more 
difficult,  for  the  utiUties  that  flow  from  a  home  have  an  un- 
settled market  price.  The  best  step  to  take  in  trying  to  arrive 
at  the  value  of  such  a  site  is  to  secure  the  opinion  of  a  great 
many  persons.  Even  if  the  site  is  improved  and  the  prospective 
buyer  expects  to  rent  it,  the  opinion  of  disinterested  parties  is 
valuable,  for  after  all  it  is  to  just  such  persons  that  he  expects 
to  rent  the  property.  The  market  values  of  adjoining  proper- 
ties are  also  a  fair  guide,  particularly  if  they  are  being  utiUzed 
by  tenants ;  for  it  is  a  safe  assumption  that  the  united  judgments 
of  many  buyers  and  sellers  are  approximately  correct.  In  any 
case,  the  ultimate  value  of  the  site  must  be  determined  by  so- 
ciety, for  the  difference  between  this  particular  site  and  some 
other  one  is  largely  a  social  matter. 

EXERCISES  AND   PROBLEMS 

A  - 

1.  Distinguish  between  economic  rent  and  commercial  rent. 

2.  Why  is  one  piece  of  farm  land  preferred  to  another  piece  ? 

3.  What  factors  determine  this  preference? 

4.  What  is  no-rent  land? 

5.  Just  how  can  a  farmer  afford  to  operate  no-rent  land  ? 

6.  How  does  a  change  in  the  price  of  wheat  affect  the  economic 
rent  of  wheat  lands  ? 

7.  What  effect  has  soil  "butchery"  on  economic  rent? 

8.  Just  how  does  improved  means  of  transportation  affect  economic 
rent? 

9.  How  in  general  is  economic  rent  affected  by  an  increase  in 
population  ? 

10.  How  does  custom  and  habit  assist  to  determine  the  economic 
rent  of  store  sites? 

11.  What  other  factors  are  important? 

12.  Explain  what  is  meant  by  "unearned  increment." 

13.  What  is  the  relation  between  this  increment  and  the  single  tax? 

14.  Distinguish  clearly  between  an  "increment"  and  a  "decre- 
ment." 


342  ,  ELEMENTARY   ECONOMICS 

15.  What  is  the  relation  between  economic  rent  and  price? 

16.  Why  does  economic  rent  not  enter  into  price? 

17.  Just  how  does  the  interest  rate  affect  land  values  ? 


1.  Make  a  tour  of  inspection  about  your  community. 

a.  Notice  the  wide  variations  in  the  utilization  of  business  sites. 

b.  Do  these  business  sites  yield  more  or  less  than  equal-sized  sites 

in  the  residence  districts? 

c.  Notice  the  sites  which  form  a  fringe  about  the  business  section. 

i.  How  are  they  utilized  ? 

ii.  What  about  the  improvements  found  there? 
iii.  Do  they  seem  to  be  in  a  state  of  transition  f     Explain. 

d.  Contrast  the  various  residence  sections. 

i.  What  factors  cause  some  sites  to  yield  more  economic  rent 

than  others? 
ii.  Just  how  do  these  factors  differ? 

e.  Notice  the  number  and  location  of  vacant  sites. 
*       i.  Why  are  these  not  utilized? 

ii.  Are  there  evidences  of  owners  trjdng  to  secure  unearned 
increments  ? 
/.   Widen  your  definition  of  "urban  economic  rent." 

2.  Suppose  you  were  to  become  heir  to  a  cultivated  farm  located  in 
Patagonia.     How  would  you  determine  its  selling  price  ? 

3.  Inquire  among  business  men  and  others  concerning  some  instance 
of  unearned  increment. 

a.  Determine  as  accurately  as  possible  the  size  of  the  increment 

.     (difference  between  buying  price  and  selling  price). 
6.  Estimate  the  interest  on  the  investment  at  a  fair  rate. 

c.  Subtract  from  the  interest  any  income  that  may  have  been 

received. 

d.  What  portion  of  the  increment  appears  to  have  been  unearned  f 

e.  Is  this  portion  more  or  less  than  it  seemed  to  be  when  you 

began  your  examination  ? 

4.  Find  an  example  of  "  decrement "  in  your  community. 
a.  What  influences  caused  this  decrement? 

h.  Have  you  heard  any  one  propose  that  society  should  com- 
pensate the  owner  for  his  loss  ?     Who  ? 


RETURN  TO  LAND    (RENT)  343 

5.   If  you  were  seeking  a  site  for  a  cigar  store,  how  would  the  location 
of  the  following  influence  you  : 
a.  Other  cigar  stores  ? 
h.  Dry  goods  stores  ? 

c.  Restaurants  ? 

d.  Show  houses  ? 

e.  Garages? 
/.    Hotels? 

g.  Soda  fountains  ? 
h.  Drug  stores  ? 
i.   Railway  depots? 

C 

1.  A  prominent  United  States  senator  once  made  the  public  state- 
ment that  the  high  prices  of  farm  products  then  prevailing  were  caused 
by  high  rents. 

a.  Would  you  expect  this  statement  to  be  criticized?     Why? 

b.  What  fixes  the  price  of  any  farm  product  ? 

c.  What  is  the  relation  between  the  prices  of  farm  products  and 

the  economic  rent  of  the  land  on  which  they  are  grown? 

2.  Why  does  the  contract  rent  of  a  piece  of  land  often  differ  widely 
from  its  economic  rent? 

3.  How  are  the  following  likely  to  affect  the  economic  rent  of  farm 
lands : 

a.  Improved  machinery? 

h.  Discovery  of  new  fertilizer? 

c.  Improved  methods  in  farming  ? 

d.  Change  in  interest  rate  ? 

e.  Automobiles? 

4.  A  merchant  located  on  the  fringe  of  a  business  district  often 
advertises  that  he  can,  owing  to  the  low  rent  which  he  pays,  sell  goods 
cheaper  than  competing  merchants  nearer  the  business  center. 

a.  Why  is  his  rent  lower  than  theirs  ? 

b.  Suppose  he  gets  the  business  of  his  competitors. 

i.  How  will  the  economic  rent  of  his  site  be  affected? 
ii.  How  would  this  affect  his  contract  rent  ? 
iii.  Would  this  claim  of  cheap  rent  continue  to  be  valid? 
Explain. 

c.  Does  his  lower  rent  permit  him  to  undersell  his  competitors  ? 


344  ELEMENTARY   ECONOMICS 

5.  Assuming  that  each  piece  of  farm  land  yields  its  entire  economic 
rent  to  its  owner,  why  do  tenants  prefer  one  piece  over  another? 
Explain  with  some  detail. 

6.  Sometimes  a  retail  merchant  advertises  that  he  can  afford  to 
undersell  his  competitors  because  he  happens  to  own  the  store  site 
which  he  utilizes. 

a.  Does   the   land   underneath   his   store   building   earn   rent? 

Explain. 

b.  Suppose  a  competitor  who  does  not  own  his  store  building 

should  invest  the  value  of  his  site  in  railroad  bonds, 
i.  Would  he  be  justified  in  advertising  that  he  could  undersell 

his  competitors  because  he  owned  bonds? 
ii.  How  would  the  buying  public  regard  such  an  advertise- 
ment ? 

c.  If  he  can  afford  to  distribute  his  rent  among  his  customers, 

why  should  he  not  also  advertise  that  he  can  undersell  his 
competitors  because  he  owns  his  own  capital  or  because  his 
wife  and  children  wait  on  his  customers  without  pay? 

SUPPLEMENTARY   READING. 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  435-446. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  407-426. 

Fetter,  Economics,  Vol.  I,  pages  89-168. 

Johnson,  Introduction  to  Economics,  pages  215-231. 

Seager,  Principles  of  Economics,  pages  229-243. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  371-391. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  II,  pages  55-106. 


CHAPTER  XXV 
RETURN    TO    CAPITAL    (INTEREST) 

79.   Interest  Peculiar  to  Modern  Industry 

Attitude  of  the  medieval  church  toward  interest.  —  The 
church  fathers  of  the  Middle  Ages  looked  on  the  taking  of  inter- 
est as  a  sin.  In  assuming  this  position  they  were  influenced  no 
doubt  by  the  fact  that  most  loans  were  consumption  loans  — 
that  is,  loans  contracted  for  the  purpose  of  acquiring  consumable 
goods.  They  did  not  believe  that  money  was  productive. 
Consequently,  they  declared  that  a  debt  was  fully  discharged 
when  the  borrower  returned  all  that  he  had  borrowed.  Because 
of  the  refusal  of  the  church  to  countenance  the  taking  of  in- 
terest, the  money-lending  business,  as  was  noticed  in  an  earlier 
connection,  naturally  fell  into  the  hands  of  the  Jews  and  the 
Lombards.  Here  no  doubt  is  one  of  the  chief  causes  of  the 
bitter  feeling  that  existed  between  the  Jews  and  their  Christian 
neighbors.  The  latter,  regarding  all  interest  as  usury,  looked 
on  the  Jews  with  contempt.  Shakespeare  clearly  recognized 
the  two  divergent  viewpoints  when  he  made  Shylock  say  in 
the  Merchant  of  Venice  : 

"Signior  Antonio,  many  a  time  and  oft 
In  the  Rialto  you  have  rated  me 
About  my  moneys  and  my  usances  :". 

To  this  Antonio,  the  merchant,  answered : 

"If  thou  wilt  lend  this  money,  lend  it  not 
As  to  thy  friends ;    for  when  did  friendship  take 
A  breed  of  barren  metal  of  his  friend  ? 
But  lend  it  rather  to  thine  enemy, 
Who,  if  he  break,  thou  mayst  with  better  face 
Exact  the  penalties." 

345 


346  ELEMENTARY   ECONOMICS 

Rise  of  a  money-lending  class.  —  Despite  the  attitude  of  the 
medieval  church  many  Christians  loaned  money.  Especially 
widespread  was  the  practice  of  moneyed  men  to  evade  the  spirit 
of  the  law  without  violating  its  letter  by  becoming  silent 
partners  in  trading  enterprises.  Gradually  the  attempt  even 
to  comply  with  the  letter  of  the  law  was  abandoned ;  one  by 
one  the  nations  withdrew  their  support  ftom  this  particular 
capon  law.  Then  the  church  reluctantly  bowed  its  head  to  the 
force  of  expediency.  From  that  time,  accumulations  of  wealth 
have  more  and  more  sought  outlets  to  investments.  Now 
numerous  groups  give  their  entire  time  to  bringing  lenders  and 
borrowers  together.  We  have  seen  already  how  important  in 
this  respect  are  the  various  kinds  of  bankers.  Only  a  little  less 
so  are  note  brokers,  real  estate  loan  agencies,  building  and  loan 
associa-tions,  and  lawyers. 

So  common  is  the  phenomenon  of  borrowing  and  lending  that 
scarcely  one  of  us  has  ever  given  a  thought  of  why  interest  can 
be  paid,  and  how  much  the  rate  should  be.  Yet  no  subject  in 
modem  economics  has  created  more  discussion  and  debate.  The 
ablest  economists  of  the  time  have  spent  years  on  the  why  phase 
of  interest,  and  have  published  monumental  works  to  support 
their  conclusions.  This  unsettled  situation,  however,  need  not 
deter  us  from  glancing  hastily  at  the  question  in  its  broadest 
aspects. 

80.  Why  Interest  Is  Paid  and  How  Much 

The  viewpoint  of  the  borrower.  —  We  have  learned  already 
that  labor  and  land,  when  assisted  by  capital,  produce  more 
than  when  working  alone.  The  best  evidence  of  this  fact  is  the 
tremendous  volume  of  modem  production  compared  with  what 
we  might  expect  to  be  produced  if  all  capital  were  removed  or  if 
it  had-  never  existed.  No  One  doubts  that  the  sudden  dis- 
appearance of  capital  from  the  face  of  the  earth  would  in  a 


RETURN   TO   CAPITAL   (INTEREST) 


347 


short  time  result  in  the  starvation  of  half  of  the  human  race. 
The  borrower,  then,  since  he  knows  from  experience  and 
observation  that  he  can  afford  to  pay  a  premium  for  the  use  of 
capital,  is  willing,  if  necessary,  to  bid  up  to  the  point  of  his 
expected  gain.  The  wide  variety  of  business  enterprises 
combine  with  the  different  expectations  of  enterprisers,  to  make, 
these  independent  bids  cover  a  wide  range  which  we  may  illus- 
trate as  follows : 


Fig.  11. 


Borrower  A  is  willing  if  necessary  to  go  to  AK  (12  per  cent)  ; 
B,  to  BL  (8  per  cent) ;  C,  to  CM  (5  per  cent) ;  and  D,  to  DN  (4 
per  cent).  It  should  be  noticed  that  the  borrowers'  curve  is  a 
demand  curve. 


348 


ELEMENTARY   ECONOMICS 


The  viewpoint  of  the  lender.  —  The  lender  also  knows  that 
capital  is  productive,  but  that  in  itself  does  not  explain  satis- 
factorily why  he  saves  rather  than  spends  his  capital.  Saving 
means  abstinence  for  the  ordinary  individual,  and,  as  we  shall 
see,  modern  production  bids  for  the  savings  of  all  regardless  of 
wealth  and  income.     Furthermore,  it  is  a  human  characteristic 


H    X 


Fig.  12. 


that  the  normal  man  prefers  present  goods  to'  future  goods  — 
that  is,  present  consumption  to  future  consumption.  This 
characteristic  is  most  prominent  among  primitive  peoples  and 
among  children.  The  American  Indian  seldom  ever  stored  food 
for  future  consumption,  though  he  was  aware  from  experience 
that  famine  might  be  expected  before  the  approaching  winter 


RETURN   TO   CAPITAL    (INTEREST)  349 

was  over.  Most  boys  and  girls  would  rather  eat  their  candy  or 
cake  today  than  to  wait  until  tomorrow.  Even  older  children 
often  prefer  to  see  a  second-rate  film  today  to  a  much  better 
one  next  week.  Even  adults  are  not  free  from  this  form  of  im- 
patience, though  as  a  general  rule  it  is  less  prominent  among 
them.  Since  most  of  us  value  present  goods  more  highly  than 
future  goods,  it  follows  that  some  inducement  must  be  held  out 
to  us  to  cause  us  to  postpone  consumption  —  that  is,  to  ex- 
change present  goods  for  future  goods.  This  inducement  we 
call  interest.  It  is  the  price  for  waiting.  Different  people  set 
different  prices  on  the  pain  of  waiting.  Some  demand  a  very 
high  reward,  some  a  more  moderate  one,  a  few  have  no  prefer- 
ence, while  occasionally  we  are  able  to  find  an  individual  that 
actually  prefers  future  to  present  goods.  We  may  arrange  the 
various  savers  in  the  manner  as  shown  on  opposite  page. 

Those  to  the  left  of  Z  will  pay  to  be  permitted  to  save,  and 
those  at  Z  will  save  without  reward.  As  we  move  along  the 
curve  to  the  right  of  Z  the  price  demanded  for  abstinence  rises. 
E  demands  EP  (4  per  cent) ;  F  demands  FQ  (5  per  cent) ;  G 
demands  GR  (8  per  cent) ;  while  H,  who  has  the  least  desire  to 
postpone  consumption,  demands  HS  (12  per  cent). 

Fixing  the  current  interest  rate.  —  We  may  now  inquire  how 
the  current  rate  of  interest  is  fixed.  Since  the  borrowers  are 
really  buyers  of  capital  and  the  lenders  sellers  of  capital  we  can 
apply  the  principle  developed  in  the  chapter  on  determining  the 
market  price  of  goods.  Like  buyers  of  goods,  borrowers  have  a 
maximum  price  (interest  rate)  in  mind;  and  lenders^  like 
sellers,  consider  only  a  minimum  price  (interest  rate).  Borrower 
A,  to  revert  to  Fig.  11,  is  willing  to  go  as  high  as  12  per  cent  but 
no  higher.  Borrower  B  will  go  no  higher  than  8  per  cent,  while 
borrowers  C  and  D  have  in  mind  a  maximum  rate  of  5  and  4 
per  cent,  respectively.  Lender  H  must  have  at  least  12  per 
cent ;  lender  G,  8  per  cent ;  lender  F,  5  per  cent ;  and  lender 


350 


ELEMENTARY   ECONOMICS 


E,  4  per  cent.  Obviously,  any  one  of  the  lenders  would  be 
willing  to  supply,  to  the  extent  of  his  lending  capital,  the 
wants  of  borrower  A.  But  A,  eager  to  pursue  his  own  economic 
advantage,  quickly  sees,  since  he  does  not  desire  all  the  capital 
available,  that  some  of  the  lenders  have  a  minimum  rate  far 
below  his  maximum.  Also  those  with  lower  minimum  rates 
will  not  permit  any  one  of  their  numbe^r  to  secure  A's  maximum 
rate  at  the  expense  of  leaving  their  savings  uninvested.  Thus 
from  the  opposing  forces  there  emerges  an  interest  rate  which 
will  permit  the  largest  amount  of  money  to  be  loaned.  This 
we  call  the  current  rate,  and  its  location  may  be  illustrated  as 
follows: 


0 


\^ 

V 

/ 

Amount  Borrowed 

\ 

^ 

y 

Amount  Loaned 

y 

<-. 

^ 

■^ 

4) 

O 

c 

» 

.-' 

X 

-" 

*- 

Fig 

r.     1 

3. 

RETURN   TO   CAPITAL    (INTEREST)  351 

81.   Variations  in  the  Interest  Rate 

The  risk  element.  —  So  far  in  our  discussion  of  the  interest 
question  we  have  considered  only  pure  interest,  and  the  current 
rate  of  pure  interest.  We  may  now  examine  some  of  the  forces 
that  cause  (1)  the  current  rate  of  contract  interest  to  be  above 
the  current  rate  of  pure  interest,  and  (2)  variations  in  rates  of 
contract  interest.  Risk  is  the  chief  cause  for  the  difference 
between  pure  interest  and  contract  interest.  No  debt,  we  may 
say,  is  absolutely  sure  to  be  paid,  though  in  the  case  of  United 
States  bonds  uncertainty  is  reduced  to  a  minimum.  Risk  in- 
creases rate.  Government  obligations  bear  a  relatively  low 
rate  of  3  or  4  per  cent ;  railroad  bonds,  5  per  cent ;  ordinary 
bank  paper  (promissory  notes) ,  6  or  7  per  cent ;  while  collateral 
loans  made  by  pawn  shops  often  bear  a  rate  of  30  or  40  per  cent. 
A  portion  of  the  interest  income,  therefore,  represents  risk. 

Fixity  of  investment.  —  Some  loans  or  investments  are  pre- 
ferred to  others  even  where  there  is  the  same  element  of  risk  in- 
volved. A  railroad  bond,  for  example,  usually  bears  a  lower  rate 
of  interest  than  a  first-class  farm  mortgage.  Here  the  risk 
element  is  very  low,  but  bonds  are  much  easier  sold  than  are 
mortgages ;  hence  the  difference  in  rates.  Banks  also  vary 
rates  of  interest  paid  on  deposits  according  to  the  degree  of 
fixity.  City  banks  often  pay  2  per  cent  on  checking  deposits 
and  3  per  cent  on  savings.  Depositors  may  withdraw  the  former 
on  demand,  while  in  the  latter  case  the  bank  has  the  right  to 
compel  formal  notice  of  several  days.  Likewise  in  lending 
money,  banks  usually  charge  less  interest  on  a  call  loan  than 
on  a  time  loan.  One  they  can  have  paid  on  demand ;  for  the 
other  they  must  wait  until  it  is  due.  Thus  we  see  that  the  lender 
who  reserves  the  right  to  have  his  loan  returned  to  him  quickly 
must  accept  a  less  reward  for  his  waiting  than  would  be  necessary 
if  he  were  willing  to  forego  this  reservation.     Also  the  borrower 


352  ELEMENTARY   ECONOMICS       . 

is  unwilling  to  pay  as  much  premium  for  capital  over  which  he 
has  an  uncertain  control  as  he  would  pay  if  his  control  were  made 
more  certain. 

Variations  among  ixidustries.  —  It  often  happens  that  a  cer- 
tain industry  is  prosperous  above  the  average.  Usually,  under 
these  circumstances,  enterprisers,  eager  to  enlarge  their  busi- 
ness, pay  a  higher  interest  rate  than  is  current  at  the  time. 
Other  enterprisers  seeing  the  prosperity  of  this  particular  in- 
dustry will  quietly  enter  the  field  and  bid  high  for  capital.  As 
a  result  there  is  some  variation  in  the  interest  rates  among 
different  industries. 

Variations  among  localities.  —  In  a  large  country  like  the 
United  States  there  is  a  wide  variation  in  the  interest  rate. 
Even  the  states  recognize  this  fact  in  their  usury  laws.  Some 
restrict  the  legal  rate  of  interest  to  6  per  cent,  some  to  7  per 
cent,  while  others  permit  as  high  a  rate  as  10  per  cent.  Three 
closely  related  causes  account  for  this  variation :  (1)  relative 
scarcity  of  capital,  (2)  cost  of  supervising  loans,  (3)  lack  of 
information  on  the  part  of  lenders. 

In  the  newer  sections  of  the  country,  capital  is  scarce.  Yet 
it  is  there  that  capital  can  usually  be  used  to  the  best  advantage 
in  improving  farms,  in  building  cities,  and  in  starting  manu- 
factures. Naturally,  enterprisers  bid  high  for  the  scanty  stock. 
The  question  may  very  properly  be  raised,  however :  Why  does 
not  the  capital  of  older  sections  flow  to  these  regions  of  high 
interest  rates?  First  of  all,  there  is  a  greater  degree  of  un- 
certainty connected  with  the  industries  here  than  would  be  the 
case  if  they  were  being  carried  on  in  the  older  settled  regions. 
For  that  reason  a  lender  hesitates  to  loan  his  funds,  especially 
if  he  is  not  in  a  position  to  supervise  them  to  the  extent  of 
protecting  his  own  interests.  The  next  best  thing  he  can  do  is 
to  send  them  to  some  bank  or  mortgage  concern  in  the  newly 
settled  section  with   instructions  to  loan  them  to  the    best 


RETURN   TO   CAPITAL    (INTEREST)  353 

advantage.  Granted  that  the  security  offered  is  ample,  yet 
there  has  been  some  cost  in  handhng  the  funds,  which  will 
appear  in  the  form  of  higher  interest  rates.  Finally,  the  lender, 
unless  he  is  in  a  particularly  good  position  to  get  information, 
is  likely  to  know  little  about  either  the  borrower  or  the  banker. 
Hence  he  prefers  to  loan  his  fimds  nearer  home  even  at  a  lower 
rate. 

EXERCISES  AND   PROBLEMS 


1.  Just  why  did  the  medieval  church  oppose  the  taking  of  interest  ? 

2.  What  is  the  difference  between  a  consumption  loan  and  a  pro- 
duction loan  ? 

3.  In  the  conversation  between  Shylock  and  the  merchant  Antonio, 
what  is  the  significance  of  the  following  expressions:  "usances"? 
"barren  metal"?  "exact  the  penalties"? 

4.  Just  how  was  a  silent  partner  able  to  loan  money  without  evad- 
ing the  law  ? 

5.  What  are  the  two  aspects  of  interest  ? 

6.  Why  will  borrowers  pay  interest  on  loans? 

7.  Why  must  lenders  be  rewarded? 

8.  What  determines  the  maximum  interest  rate  a  borrower  will 
pay? 

9.  What  is  the  lowest  interest  rate  which  a  lender  will  accept  ? 

10.  Just  why  are  present  goods  usually  valued  more  highly  than 
future  goods? 

11.  Is  saving  painful  ?     Explain. 

12.  Why  should  the  legal  interest  rate  be  higher  in  Wyoming  than  in 
Massachusetts  ? 

13.  What  is  a  "call  loan"? 

14.  Why  do  lenders  prefer  a  call  loan  to  a  time  loan? 

15.  Why  is  the  interest  rate  on  bonds  usually  lower  than  the  div- 
idends on  stocks  of  the  same  concern? 

16.  Why  is  a  railroad  bond  more  negotiable  than  a  farm  mortgage  ? 

17.  What  kind  of  real  estate  mortgages  resemble  bonds? 

18.  Where  is  the  best  market  for  real  estate  mortgages  usually  found? 

19.  Why  are  real  estate  mortgages  usually  recorded? 


354  ELEMENTARY   ECONOMICS 


1.  Put  the  following  questions  to  some  friendly  business  man: 
"Why  are  you  willing  to  pay  interest  on  borrowed  money ? "  "Would 
you  be  willing,  rather  than  to  do  without,  to  pay  a  higher  rate  than  you 
now  pay?"  "How  would  an  increase  in  the  current  interest  rate 
be  likely  to  affect  your  business?" 

2.  Examine  any  metropolitan  newspaper  for  quotations  on  New 
York  interest  rates. 

a.  Name  the  various  kinds  of  loans  found. 
h.  Which  bears  the  higher  interest  rate? 

c.  Consult  some  banker  regarding  the  New  York  interest  rate, 
i.  Inquire  about  the  nature  of  a  demand  loan. 

ii.  Ask  him  to  explain  why  the  rate  on  commercial  loans  varies 
but  slightly. 

d.  Compare  these  quotations  with  quotations  found  in  older 

newspapers.  '^ 

3.  Call  to  mind  instances  when  present  goods  commanded  a  very 
high  premium  over  future  goods ;  when  future  goods  were  more  greatly 
desired  than  present  goods. 

4.  Name  five  forms  of  investment  with  which  you  are  familiar. 
a.  Which  bears  the  highest  interest  rate?  the  lowest? 

6.  To  what  extent  does  risk  cause  the  difference  ? 

5.  Inquire  of  some  banker  concerning  the  opportunities  of  banks  in 
the  older  states  to  loan  money  in  the  newer  regions. 


1.  Aristotle  spoke  of  money  as  being  barren,  and  hence  incapable  of 
producing  interest. 

o.  Do  enterprisers  borrow  money,  or  is  it,  in  the  long  run,  equip- 
ment for  producing  goods? 

h.  What  assurance  has  an  enterpriser  that  his  borrowed  equip- 
ment will  reproduce  itself  and  something  over  in  the  way 
of  interest? 

2.  Suppose  it  should  become  generally  known  that  excessive  profits 
are  being  made  in  the  manufacture  of  shoes. 

a.  How  would  this  knowledge  affect  enterprisers  in  other  lines? 

b.  What  would  be  the  effect  on  the  production  of  shoes  ? 

c.  Would  the  prices  of  shoes  rise  or  fall  ?     Why  ? 


RETURN   TO   CAPITAL    (INTEREST)  355 

d.  How  would  this  change  affect  the  profits  of  shoe-manu- 
facturers ? 

3.  Discuss  the  desirability  of  a  state  legislature  fixing  a  legal  rate 
of  interest  above  which  the  law  provides  a  penalty  for  going. 

4.  As  a  result  of  an  insistent  demand  the  government  established 
in  1916  a  farm  loan  bank  which  furnishes  farmers  money  at  a  moderate 
rate  of  interest. 

a.  From  which  sections  of  the  country  would  you  expect  the 
demand  to  have  been  the  strongest?     Why? 

h.   How  did  the  bankers  regard  this  new  bank? 

c.  Has  it  succeeded  to  an  extent  in  equalizing  the  interest  rate 
over  the  whole  country? 

5.  The  "sacrifice"  theory  of  interest  is  often  criticized  on  the 
ground  that  such  men  as  Rockefeller  and  Morgan  make  no  sacrifices 
in  abstaining  from  consuming  their  wealth. 

a.  Can  wealthy  men  like  these  save  all  the  capital  needed? 

b.  Which  savers  exert  the  greatest  influence  in  fixing  the  interest 

rate? 

c.  Do  these  savers  sacrifice  ?     Explain. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  423-435 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  493-524. 

Fetter,  Economics,  Vol.  I,  pages  235-313. 

Fisher,  Elementary  Principles  of  Economics,  pages  410-432. 

Johnson,  Introduction  to  Economics,  pages  217-231. 

Seager,  Principles  of  Economics,  pages  262-282. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  313-328. 

Taussig,  Principles  of  Economics,  2d  ed..  Vol.  II,  pages  3-43. 


CHAPTER  XXVI 

RETURN   TO   THE   BUSINESS    MAN    (COMPETITIVE 
PROFITS) 

82.  Place  of  the  Business  Man  in  Industry 

The  business  man  combines  the  factors  of  production.  — 
Hitherto  we  have  discussed  the  place  of  land,  labor,  and  capital 
in  production,  and  the  share  of  distribution  going  to  each,  as  if 
these  factors  were  guided  in  their  work  by  internal  forces. 
Both  land  and  capital  are  stone  blind.  Workers,  too,  need 
direction.  Some  one  must  anticipate  probable  demands, 
determine  the  relative  amount  of  each  factor  to  employ  in 
production,  and  provide  for  supplies  of  raw  materials.  In  other 
v/ords,  there  is  a  productive  function  apart  from  land,  labor, 
and  capital.  Consequently,  there  has  developed  in  modern 
industrial  society  a  group  of  men  who  devote  their  time  and 
abihties  to  performing  this  function.  Such  men  we  call  enter- 
prisers.  Every  business  man,  in  fact,  no  matter  how  large  or 
how  small  his  operation,  is  necessarily  an  enterpriser. 

Responsibility  of  the  business  man.  —  Since  it  is  the  func- 
tion of  the  enterpriser  to  combine  land,  labor,  and  capital  in 
such  a  way  as  to  make  them  productive,  it  naturally  follows 
that  he  must  assume  all  of  the  risks  involved  in  his  undertaking. 
Modern  practices  require  him  to  enter  into  binding  contracts 
for  the  factors  of  production  before  he  has  prepared  a  single 
unit  of  his  goods  for  the  market.  One  about  to  undertake  the 
manufacture  of  cloth,  for  example,  must  rent  or  purchase  a 

356 


RETURN   TO   THE   BUSINESS  MAN  357 

site  for  his  plant,  must  construct  factory  buildings,  and  finally 
he  must  agree  with  cloth-weavers  to  pay  them  certain  wages. 
The  farmer  has  similar  experiences.  He  buys  or  rents  land, 
prepares  the  soil  for  seeding,  plants,  and  cultivates.  He  may  or 
he  may  not  reap  crops  sufficiently  valuable  to  pay  for  the  costs 
involved.  Whether  or  not  he  does,  is  no  concern  of  land,  labor, 
and  capital;  that  is,  each  of  these  factors  is  protected  by  a 
binding  contract  with  the  enterpriser.  Every  enterpriser  must 
take  these  risks;  otherwise  enterprisers  would  not  be  enter- 
prisers. The  importance  of  risk-taking  is  overlooked  by  many, 
who,  blinded  by  the  brilliant  successes  of  some  enterprisers, 
assume  or  pretend  to  assume  that  the  typical  business  man's 
reward  in  the  form  of  profits  is  always  unjustified.  Herein 
lies  the  weakness  of  any  system  that  would  eliminate  the  enter- 
priser from  industry. 

Characteristics  of  the  business  man.  — The  business  man  of 
this  country  possesses  certain  characteristics  which  we  may 
examine  at  this  point.  First  of  afl,  the  typical  American  enter- 
priser is  daring ;  so  daring  in  fact,  that  foreign  observers  have 
said  that  he  would  be  willing,  if  necessary,  to  pay  to  be  allowed 
to  assmne  business  risks.  Overdrawn  as  this  statement  is,  it 
points  to  a  significant  tendency.  Not  only  is  he  daring,  but  he 
is  resourceful.  Like  a  good  soldier  he  watches  every  movement 
of  those  opposed  to  him,  takes  advantage  of  every  opportunity, 
and  uses  his  own  forces  to  the  best  advantage.  In  short, 
he  often  accomplishes  the  impossible.  Moreover,  the  typical 
American  enterpriser  is  imaginative.  Particularly  among  our 
captains  of  industry  do  we  find  this  characteristic  well  developed. 
On  no  other  ground  can  we  explain  the  numerous  trans- 
continental railroads,  the  irrigation  projects  of  the  Southwest, 
the  great  steel  mills  at  Gary,  Indiana,  and  Bethlehem,  Penn- 
sylvania, and  the  Panama  Canal.  Such  projects  do  not  result 
from  accident;   they  must   mature  in  the  mind  before  they 


358  ELEMENTARY   ECONOMICS 

become  realities.  James  J.  Hill  owed  much  of  his  success  as  a 
master  railroad-builder  to  a  highly  developed  imaginative 
abihty .  In  a  more  modest  way  the  pioneer  farmers  of  the  West 
and  Middle  West  saw  in  the  future  the  long  stretches  of  timber 
land  and  the  trackless  prairies  give  way  to  prosperous  farming 
communities.  They  not  only  saw,  but  they  also  dared  to  make 
the  ''  great  venture/^  to  pit  their  resourcefulness  against  the 
hostility  of  an  unsettled  country. 

Source  of  the  business  man's  characteristics.  —  Enter- 
prisers, in  common  with  all  other  members  of  the  human  race, 
get  their  business  characteristics  from  two  sources :  (1)  heredity, 
(2)  education.  Some  are  especially  endowed  by  nature  ;  some 
acquire  success  as  enterprisers,  by  long  hours  of  study  and 
appUcation ;  a  few  combine  both  characteristics  to  a  high  degree. 
It  is  safe  to  say,  however,  that  the  typical  business  man  — 
farmer,  merchant,  manufacturer  —  is  fairly  well  born  and 
fairly  well  trained ;  that  is,  he  can  attribute  his  economic  suc- 
cess partly  to  his  ancestors  an5  partly  to  his  own  efforts.  What 
he  lacks  in .  heredity  he  may  usually  make  up  in  education. 
Which  of  these  two  forces  is  the  more  important  ?  At  the  risk 
of  starting  a  fruitless  discussion  we  may  say  with  some  assurance 
that  heredity  asserts  itself  especially  strong  during  the  earlier 
years  of  business,  while  education  and  training  (experience) 
necessarily  exert  themselves  at  a  later  date.  The  importance 
of  the  sources  of  business  characteristics  becomes  significant 
when  we  try  to  account  for  the  place  of  the  enterpriser  in 
industry.  We  know  what  he  does,  but  we  must  also  know  why 
society  rewards  him  for  his  services.  If  he  is  created  of  finer 
clay  than  most  men,  then,  so  far  as  his  share  in  distribution  is 
concerned,  he  resembles  land.  If  he  succeeds  by  study  and 
training  then  he  resembles  labor.  In  either  case,  his  reward 
is  a  differential  —  that  is,  it  depends  on  his  superiority  over  the 
margin. 


RETURN   TO   THE   BUSINESS   MAN  359 

83.  The  Nature  and  Source  of  Profits 

Profits  are  residual.  —  With  the  place  of  the  business  man 
established  in  modern  industry,  we  may  now  turn  to  the  nature 
and  source  of  the  distributive  share  which  goes  to  him  for  his 
services. 

The  enterpriser,  we  have  seen,  enters  into  a  contract  to  pay 
definite  amounts  to  land,  labor,  and  capital  for  assisting  him  in 
his  enterprise.  Eventually,  when  the  product  is  sold,  the 
enterpriser  is  in  a  position  for  the  first  time  to  strike  a  balance 
between  what  he  has  paid  out  and  what  he  has  received.  If  the 
latter  exceeds  the  former  we  say  that  he  has  made  a  profit. 
Otherwise,  unless  the  two  items  are  exactly  the  same,  which  is 
unlikely,  we  say  that  he  has  made  a  negative  profit  —  that  is, 
suffered  a  loss.  Obviously,  then,  profits  are  residual.  They 
are  what  is  left  over  after  all  other  shares  in  distribution  have 
been  paid.  They  stand  exposed  to  every  fluctuation  in  the 
size  of  the  payments  for  raw  materials  and  to  the  three  factors  "^ 
of  production. 

Guarding  against  price  fluctuation.  —  In  the  last  sentence 
above  we  have  the  key  to  the  source  of  profits.  Price  fluctua- 
tions—  in  wages,  interest,  rent,  raw  materials,  and  finished 
products  —  are  at  the  bottom  of  all  profits  or  losses.  If  the 
prices  of  everything  entering  into  the  product  of  any  particular 
enterprise  were  absolutely  fixed,  and  the  price  of  the  finished 
product  itself  known  in  advance,  there  would  be  little  room  for 
profits.  Usually  there  is  no  way  to  guard  against  price  fluctua- 
tion, and  it  is  not  certain  that  enterprisers  in  general  would  wel- 
come any  change  that  might  threaten  the  existence  of  their 
profits.  Often  a  house-builder,  when  he  agrees  to  erect  a  struc- 
ture at  a  certain  price,  protects  himself  by  contracting  at  the 
same  time  for  the  building  material  to  be  used  in  its  con- 
struction.    Clothing  manufacturers,  also,  when  they  sell  men's 


360 


ELEMENTARY   ECONOMICS 


suits  for  future  delivery  often  base  their  prices  on  a  previously 
arranged  price  for  cloth. 

The  highest  development  in  this  respect  has  been  in  the  flour 
industry.  To  protect  themselves  from  possible  loss,  millers 
usually  are  willing  to  forego  possible  gains  by  buying  wheat  for 


Courtesy  of  Mr.  Leslie  F.  Gates,  Chicago. 

Scene  on  the  Chicago  Board  of  Tbade. 


future  delivery.  We  can  best  understand  how  this  is  done  if  we 
consider  a  concrete  case.  Miller  A  is  asked  in  December  to 
make  a  price  on  flour  to  be  delivered  in  June.  Not  wishing  to 
take  chances  he  looks  up  the  quotation  of  May  wheat  and  finds, 
let  us  say,  that  it  is  $1.00  per  bushel.  With  this  information 
he  can  as  easily  fix  the  price  of  flour  to  be  delivered  in  June  as 
he  could  if  he  were  selling  out  of  his  present  supply.     Miller  A 


RETURN   TO   THE   BUSINESS   MAN  361 

then  buys  on  the  Board  of  Trade  at  $1.00  a  bushel  enough  May- 
wheat  to  fill  his  flour  contract.  Let  us  suppose  that  when  the 
time  for  the  delivery  of  the  wheat  has  arrived  (May)  the  market 
price  is  99  cents  a  bushel  instead  of  $1.00.  Miller  A  can  compel 
delivery  at  the  contract  price,  which  is  $1.00.  Or  he  can,  if  it  is 
possible,  buy  his  wheat  in  the  local  market  at  99  cents  and 
sell  out  his  Board  of  Trade  contract  at  one  cent  per  bushel  loss. 
Suppose,  however,  that  the  market  price  in  May  was  $1.01 
instead  of  99  cents.  In  that  case  he  could  compel  delivery 
of  wheat  at  $1.00  a  bushel,  or  go  into  the  local  market  and  buy 
it  at  $1.01,  selling  out  his  Board  of  Trade  contract  at  one  cent 
per  bushel  profit.  The  important  thing  to  notice  is  that  our 
miller  has  protected  himself  from  fluctuation  in  the  price  of 
wheat,  preferring  security  to  possible  profit.  In  any  case  his 
wheat  costs  him  $1.00  a  bushel  irrespective  of  the  market 
price.  This  illustration  is  stripped  of  the  numerous  complica- 
tions which  arise  in  such  transactions,  but  it  contains  in  es- 
sence the  principle  of  what  we  may  call  industrial  insurance  — 
that  is,  insurance  against  loss  by  price  fluctuation. 

Competitive  profits  resemble  rent.  —  There  is  one  striking 
similarity  between  profits  and  rent.     Rent,  as  we  have  seen,  is  a 
differential;    that  is,  it  arises  from  differences  in  fertility  or  ^ 
location.     Profits  likewise  owe  their  existence  to  differences. 
The  best  enterpriser,  like  the  best  farm  land,  produces  abun- 
dantly ;  and  hke  the  best  farm  land  he  cannot  produce  enough 
for  all.     Consequently,  society  is  compelled  to  resort  to  poorer 
enterprisers  just  as  it  is  to  poorer^  lands.     But  the  costs  of 
production  of  poorer  enterprisers  are  higher  than  for  better 
enterprisers  in  the  same  industry,  and  they  must  get  a  return 
equal  to  what  they  have  paid  for  the  use  of  land,  labor,  and        , 
capital,  in  addition  to  their  own  wages.     In  other  words,  the      / 
poorest  enterpriser  in  any  industry  tends  to  set  the  price  of  its  ^ 
product,  while  all  other  enterprisers  in  the  same  industry  enjoy 


362 


ELEMENTARY   ECONOMICS 


a  reward,  called  profits,  for  their  superior  skill.  As  a  result, 
profits,  like  rent,  do  not  enter  into  price.  Price  fixes  profits ; 
profits  do  not  fix  price.  Figure  14  illustrates  this  point.  Society 
demands  the  services  of  four  enterprisers,  A,  B,  C,  and  D,  in  a 
certain  industry.     A's  cost  of  producing  one  unit  of  the  product 


Fig.  14. 


is  AL ;  B's  cost  is  BM ;  C's  cost  is  CN ;  and  D's  cost  is  DR. 
Clearly,  the  market  price  cannot  be  less  than  DR.  Conse- 
quently, on  each  unit  A  will  enjoy  a  profit  of  LS ;  B,  of  MT ; 
and  C,  of  NO.  If  A's  profit  were  WS  instead  of  LS  the 
price  of  the  product  would  not  be  materially  affected,  for 
the  price  DR  is  still  necessary  to  keep  D  in  business. 


RETURN   TO   THE   BUSINESS   MAN  363 

Competitive  profits  tend  to  disappear.  —  The  fact  that 
A,  B,  and  C,  in  the  illustration  above,  enjoy  profits,  will  cause 
them  to  enlarge  their  operations  in  order  to  increase  their  profits 
by  increasing  their  output.  The  demand  for  this  particular 
product  can  ordinarily  be  increased  only  by  lowering  the  price. 
But  a  lower  price  means  less  profit  per  unit.  D,  let  us  say,  will 
be  driven  from  business  and  C  will  become  the  marginal  pro- 
ducer. Obviously,  the  unit  profits  of  all  will  fall  and  it  is  likely 
that  both  A  and  B  as  well  as  C  will  suffer  a  decline  in  total 
profits.  As  competition  increases,  prices  will  continue  to  fall 
until,  we  are  safe  in  saying,  profits  will  tend  to  disappear. 
To  put  the  same  thought  in  different  language,  competitive^ 
profits  are  always  in  the  process  of  extinction.  This  tendency  is 
the  basis  for  the  trite  saying,  "  Competition  is  the  life  of  trade." 

84.   Cooperation  and  Profits 

General  attitude  toward  profits.  —  Most  of  us  regard  profits 
as  something  entirely  different  from  rent,  wages,  or  interest. 
When  a  friendly  manufacturer  says  that  he  will  sell  us  one  of  his 
products  at  cost  we  assume  at  once,  and  correctly  so,  that  he  has 
in  mind  merely  to  forego  his  profits.  Why  should  he  not  also 
share  with  us  a  portion  of  his  income  arising  from  his  land  or 
capital?  One  is  just  as  legitimately  his  as  the  other.  In  any 
case  his  total  income  is  decreased  by  just  so  much.  We  would 
not  expect  a  laborer  to  donate  us  an  hour's  work ;  nor  a  capital- 
ist, the  use  of  a  hundred  dollars  for  a  month's  time  ;  nor  a  land- 
owner, the  use  of  a  piece  of  his  land.  Why  then  are  we  not 
surprised  when  some  one  offers  to  make  a  gift  of  his  profits? 
The  difference  lies  no  doubt  in  the  fact  that  profits  are  not 
salable,  that  the  sacrifice  made  to  get  them  is  not  so  noticeable, 
and  that  they  are  residual.  Whatever  the  reason  for  its  exist- 
ence, the  general  notion  prevails  that  profits  can  be  eliminated 
easier  than  rent,  wages,  or  interest. 


364  ELEMENTARY   ECONOMICS 

Cooperation  aims  to  eliminate  profits.  —  The  most  ambitious 
attempts  to  eliminate  profits  have  taken  the  form  of  coop- 
eration. Everywhere  groups  are  planning  how  to  carry  on  this 
or  that  kind  of  industry  without  the  assistance  of  professional 
enterprisers.  Farmers  organize  cooperative  grain  elevators, 
creameries,  and  threshing  '*  rings  " ;  merchants  *  combine  to 
purchase  goods  in  larger  quantities ;  while  consumers  pool  their 
buying  ability  in  order  to  deal  directly  with  jobbers,  whole- 
salers, or  manufacturers.  Does  the  elimination  of  the  pro- 
fessional enterpriser  eliminate  profits?  If  the  farmers  of  a 
certain  community  can  manage  a  grain  elevator  so  successfully 
as  to  show  a  residual  element  at  the  end  of  the  year,  they  have 
earned  a  profit.  Perhaps  it  is  returned  to  them  the  next  year 
in  the  form  of  increased  price  or  of  decreased  storage  charges, 
yet  that  does  not  alter  the  fact  (1)  that  it  is  profits,  and  (2)  that 
it  arose  as  a  result  of  their  skill  as  enterprisers.  They  have 
eliminated  the  enterpriser  without  eliminating  his  reward.  In 
other  words,  our  group  of  farmers  has  assumed  the  risks  of  the 
business  and  is  entitled  to  any  residual  element  that  may 
'arise. 

Basis  of  successful  cooperation.  —  Since  competition  tends 
to  eliminate  profits,  and  since  the  profits  of  any  particular 
enterpriser  are  likely  to  come  from  a  relatively  large  number  of 
individuals,  the  saving  to  any  one  individual  by  the  elimination 
of  the  enterpriser  is  usually  small.  As  a  consequence,  co- 
operation is  ordinarily  possible  only  by  people  who  are  willing 
to  exert  themselves  in  order  to  effect  petty  savings.  Gen- 
erations of  self-denial  have  accustomed  the  working  classes  of 
England  to  give  careful  attention  to  their  purchases  of  food  and 
clothing.  In  this  country,  on  the  contrary,  we  have  always 
looked  on  petty  savings  as  something  akin  to  parsimony,  and 
hence  to  be  carefully  avoided.  Here  we  have  the  reason  for 
their  general  failure  in  this  country.     The  typical  American 


RETURN   TO   THE   BUSINESS   MAN  365 

housewife,  even  among  the  ranks  of  unskilled  labor,  has  not 
yet  learned  the  difference  between  nine  cents  and  ten  cents, 
though  this  difference  if  spread  out  over  the  average  family- 
expenditures  of  this  group  for  a  year  would  aggregate  forty  or 
fifty  dollars.  Cooperation  is  also  likely  to  be  hampered  in  those 
localities  or  countries  in  which  enterprisers  are  especially  skilled. 
The  Europjean  retailer  is  compelled  to  get  excessive  profits  to 
cover  losses  caused  by  his  slow-paying  customers  of  the  upper 
classes.  Here  such  compulsion  is  neither  necessary  nor  justi- 
fiable ;  merchants  do  not  strive  for  certain  customers,  as  they  are 
likely  to  do  in  Europe,  in  order  to  gain  respectability.  Occa- 
sionally cooperation  is  undertaken  to  break  a  monopolistic  hold 
on  some  industry.  Fruit-growers,  for  example,  have  found  it 
necessary  in  some  sections  of  the  country  to  market  their  own 
products  in  order  to  keep  from  being  literally  robbed. 

Success  of  cooperation  in  various  industries.  —  Coopera- 
tion is,  by  its  very  nature,  more  successful  in  some  industries 
than  in  others.  Retailing  appears  to  offer  the  best  opportunity : 
a  relatively  small  amount  of  capital  is  required;  no  great 
amount  of  enterprising  skill  is  necessary ;  and  those  interested 
come  in  contact  with  it  daily.  Cooperative  manufacturing, 
however,  is  a  more  serious  matter.  Here  must  be  settled  im- 
portant questions,  such  as  the  hiring  of  labor,  changing  the 
character  of  the  product,  and  seeking  new  markets.  To 
answer  these  questions  successfully  the  hired  manager  must 
have  such  skill  and  ability  as  to  attract  the  attention  of  com- 
peting manufacturers,  who  would  either  get  him  away  or  force 
the  cooperative  concern  to  raise  his  wages  to  a  point  where 
profits  would  be  endangered.  Moreover,  the  risks  involved  in 
retailing  are  comparatively  small,  so  that  the  members  of  the 
association  can  very  well  afford  to  carry  them.  The  largest  of 
the  English  retail  cooperative  societies — the  Rochdale  Stores — 
has  not  attempted  to  establish  its  manufacturing  business  on  a 


366  ELEMENTARY   ECONOMICS 

cooperative  basis,  largely  because  of  the  impracticability  of  the 

scheme . 

EXERCISES  AND   PROBLEMS 


1.  Why  are  profits  a  share  in  distribution? 

2.  What  is  the  chief  function  of  the  enterpriser? 

3.  Just  why  are  profits  residual  ? 

4.  Characterize  the  typical  American  enterpriser. 

5.  Why  in  the  successful  conduct  of  a  business  is  imagination  as 
important  as  skill? 

6.  In  what  way  does  enterprising  skill  resemble  land  ?  labor  ? 

7.  Should  enterprisers  be  guaranteed  a  profit  by  society  ?     Explain. 

8.  What  is  the  source  of  profits  ? 

9.  How  may  an  enterpriser  protect  himself  against  risk  ? 

10.  How  does  this  protection  affect  profits  and  losses  ? 

11.  In  what  way  do  profits  resemble  rent? 

12.  What  is  the  relation  between  profits  and  prices? 

13.  Why  do  competitive  profits  tend  to  disappear? 

14.  How  are  profits  related  to  cooperative  schemes  ? 

15.  Why  has  cooperation  usually  failed  in  the  United  States? 

B 

1.  Many  business  men,  farmers  in  particular,  call  their  entire  net 
income  profits.  Interview  some  retail  merchant  that  owns  his  own 
store  building. 

a.  How  much  does  he  set  aside  each  year  as  rent  ? 
6.  What  amount  of  interest  does  his  capital  earn? 

c.  What  portion  of  his  income  does  he  attribute  to  his  own  wages  ? 

d.  What  is  the  government's  share  in  the  way  of  taxation? 

2.  Call  to  mind  a  successful  enterpriser  in  your  community. 
a.  What  are  his  most  outstanding  business  characteristics? 
6.  Does  he  give  attention  to  details  ? 

3.  Question  a  retail  merchant  concerning  advertised  sales  in  which 
goods  are  offered  at  cost. 

a.  What  does  he  understand  by  "cost"  in  this  connection? 

h.  Does  he  always  use  the  word  "cost"  in  exactly  the  same  way? 

c.  What  variety  of  meanings  may  the  word  have? 

d.  Analyze  your  own  notion  of  its  meaning. 


RETURN   TO   THE   BUSINESS   MAN  367 

4.    Examine,  if  possible,  any  attempts  that  have  been  made  in  your 
community  to  eliminate  profits  through  cooperation. 
a.  What  was  the  nature  of  these  attempts? 
h.  Did  any  one  oppose  them?  Who? 
c.  How  well  did  they  succeed? 


1.  Explain  in  each  case  why  the  following  are,  or  are  not,  enter- 
prisers : 

a.  Farmers.  e.  Professional  beggars. 

b.  Bankers.  '  /.    Railroad  engineers, 

c.  Scissors-grinders.  g.  Factory  managers. 

d.  Gamblers.  •  h.  Taxi-drivers. 

2.  Give  reasons  why  American  enterprisers  shoiild  be  more  daring 
than  their  European  competitors. 

3.  Explain  just  how  th^  profits  of  a  cotton-cloth  manufacturer 
may  be  affected  by  the  following : 

a.  New  inventions  and  discoveries  in  spinning,  weaving,  dyeing. 

b.  Increase  or  decrease  in  the  ravages  of  the  boll  weevil. 

c.  Changes  in  style  of  clothing. 

d.  Production  of  wool,  flax,  and  silk. 

e.  Changes  in  the  current  rate  of  wages  for  farm  labor,  railroad 

men,  weavers. 
/.    Changes  in  the  current  interest  rate. 

4.  Recently  a  convention  composed  of  wheat-growers  declared  that 
the  low  price  of  wheat  then  prevailing  was  caused  by  speculation  on  the 
Chicago  Board  of  Trade.  On  the  same  day  a  body  of  millers  assembled 
in  a  near-by  city  made  the  claim  that  speculation  in  wheat  caused 
wheat  prices  to  be  too  high.     Discuss. 

5.  Sometimes  a  miller  is  found  who  refuses  to  have  any  dealings 
with  a  wheat  exchange  on  the  ground  that  to  do  so  would  be  speculation. 

a.  Can  a  miller  trade  in  wheat  without  speculating ?     How? 

b.  Can  a  miller  who  sells  flour  for  future  delivery  avoid  specula- 

tion if  he  refuses  to  buy  wheat  for  delivery  at  the  same  time  ? 
Explain. 

c.  Are  millers  more  than  other  people  likely  to  become  wheat 

speculators  ? 


368  ELEMENTARY    ECONOMICS 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  460-467. 
Ely,  Outlines  of  Economics,  3d  ed.,  pages  525-541. 
Fetter,  Economics,  Vol.  I,  pages  317-381. 
Seager,  Principles  of  Economics,  pages  198-212. 
Seligman,  Principles  of  Economics,  5th  ed.,  pages  351-370. 
Taussig,  Principles  of  Economics,  2d  ed.,  VoL  II,  pages  158-191. 


CHAPTER  XXVII 
SOCIALISM  .     . 

85.  Nature  and  Purposes  of  Socialism 

What  is  socialism  ?  —  The  spread  of  socialism  throughout 
the  world  during  the  past  generation,  with  its  doctrines  and 
claims  so  out  of  harmony  with  the  established  order  of  things,  is 
the  most  striking  social  phenomenon  of  the  time.  Socialism  is 
claiming  the  attention  of  many  of  the  most  thoughtful  people, 
though  giving  their  attention  to  the  movement  does  not  imply 
that  they  are  giving  it  their  support.  They  believe,  however, 
that  sooner  or  later  the  socialistic  question  must  be  decided 
one  way  or  another ;  and  for  that  reason  they,  as  members  of 
society,  desire  to  act  as  intelligently  as  possible  when  that  time 
comes.  As  students  of  economic  questions  we  too  should  learn 
something  about  the  demands  of  socialism,  its  program  of 
action,  the  arguments  of  its  supporters,  and  finally  about  the 
social  conditions  out  of  which  it  has  grown. 

Socialism,  in  brief,  is  a  program  which  calls  for  the  social- 
ization of  the  instruments  of  production ;  that  is,  a  program  J 
which  demands  that  the  state  alone  shall  own  the  instruments  of 
production.  Under  socialism  there  would  be  no  professional 
enterprisers  and  no  capitalists.  Some  socialists  would  also 
abolish  private  property  in  land,  though  this  doctrine  is  not 
now  universally  held.  Since  there  are  to  be  neither  enterprisers 
nor  capitalists,  it  naturally  follows  that  under  socialism  the 
shares  that  now  emerge  in  the  form  of  profits  and  interest  would 
go  to  the  workers  in  the  form  of  increased  wages.     For  that 


370  ELEMENTARY   ECONOMICS 

reason  socialism  is  best  treated  as  a  problem  of  distribution, 
though  by  its  very  nature  the  first  changes  in  a  state  passing 
to  socialism  would  be  made  in  production.  We  must  exercise 
care  in  this  connection  to  rid  our  minds  of  the  common  fallacy 
that  sociaUsm  means  a  redistribution  of  property  so  that  all 
the  members  of  society  may  have  exactly  the  same  amount  of 
wealth.  Unfortunately,  some  of  the  more  radical  socialists 
themselves  have  created  this  wrong  impression  by  their  in- 
temperate assertions. 

The  abolition  of  profits  and  interest,  and  perhaps  of  rent, 
does  not  imply  that  all  of  the  members  of  a  socialistic  state  are 
to  be  equally  wealthy.  It  merely  means  that  there  will  be  no 
^opportunity  for  investment,  and  no  opportunity  to  serve  as 
a  private  enterpriser.  Wealth  may  be  accumulated  and  in- 
herited, and  enterprising  skill  may  be  utilized  by  the  state  and 
rewarded  accordingly.  Under  socialism  no  great  leisure  class  will 
be  possible ;  that  is,  every  one  will  labor.  Tasks  will  be  appor- 
tioned according  to  strength  and  ability  and  rewarded  accord- 
ing to  need.  Socialists  lay  the  blame  for  our  industrial  ills, 
such  as  unemployment  and  crises,  to  the  present  system  of 
industry.  They  insist  that  in  a  socialist  state  everybody  will  be 
employed ;  and  that  production  will  be  nicely  adjusted  to  need. 

Basis  of  socialism.  —  The  socialists  themselves  claim  that 
the  system  of  private  industry  has  broken  down ;  that  labor  is 
being  exploited  to  pay  profits  and  interest ;  and  that  there  is  no 
prospect  of  better  things  unless  the  state  goes  over  to  socialism. 
The  most  bitter  opponents  of  socialism  dare  not  contend  that  all 
of  its  friends  are  crazy  or  even  cranks.  There  must  be,  then, 
some  basis  for  the  socialistic  movement  which  we  see  on  every 
side.  There  is  no  denying,  as  we  have  seen  in  a  previous 
chapter,  that  inequalities  of  income  and  wealth  are  glaring. 
Just  why  one  man  should  be  able  to  amass  a  fortune  of  a  half 
billion  dollars  while  millions  are  propertyless  cannot  be  ex- 


SOCIALISM  371 

plained  on  the  ground  either  of  foresight  or  of  thrift.  Is  it 
any  wonder,  then,  thai;  men  of  all  walks  of  life  are  giving  careful 
attention  to  every  proposal  that  has  for  its  end  a  more  healthy 
condition  of  industrial  society  ? 

Different  socialistic  programs.  —  As  is  to  be  expected, 
different  men  have  arrived  at  different  conclusions  regarding 
the  socialistic  program  which  the  state  ought  to  undertake. 
We  may  in  this  connection .  notice  four  different  groups  of 
sociahsts:  (1)  Utopian  socialists,  (2)  Fabian  socialists,  (3) 
Christian  socialists,  and  (4)  Marxian  socialists. 

The  first  of  these  groups,  called  the  XJtopists,  was  confined 
to  France,  England,  and  the  United  States.  Among  its  mem- 
ber were  included  two  Frenchmen,  Saint-Simon  and  Charles 
Fourier.  One  of  the  most  prominent  Englishmen  in  this  group 
was  Robert  Owen,  founder  of  a  communistic  settlement  at  New 
Harmony,  Indiana.  In  this  country  one  of  the  best-known  dis- 
ciples of  Fourier  was  Horace  Greeley,  editor  of  the  New  York 
Tribune.  These  men  had  high  ideals,  and  they  made  painful 
sacrifices  in  an  effort  to  change  them  into  actualities.  The 
Fabian  socialists  are  Englishmen.  They  beheve  that  socialism 
will  come  when  the  people  are  once  awake  to  its  merits.  To 
hasten  this  day  the  Fabian  society  of  England  offers  prizes  for 
essays  and  other  papers  dealing  with  socialism,  which  they  print 
for  general  distribution.  The  group  of  Christian  socialists  lay 
great  stress  on  the  necessity  of  society  following  the  doctrines 
'  of  the  early  Christians,  who,  they  contend,  shared  their  posses- 
sions in  common.  One  of  the  outstanding  figures  of  the  group 
was  Charles  Kingsley,  a  noted  English  preacher  and  the  author 
of  Westward  Ho!  and  Hypatia. 

More  important  for  our  discussion  are  the  Marxian  socialists. 
The  chief  figure  of  this  group  was  Karl  Marx  (b.  1818;  d. 
1883),  whose  monumental  work,  entitled  Capital  {Das  Kapital), 
is  aptly  called  the  bible  of  modern  socialism.     In  this  work  one 


372  ELEMENTARY   ECONOMICS 

Declaration  of  Karl  Marx  and  His  Friends,  1848. 

THE  COMMUNIST  MANIFESTO. 

CHAPTER  I. 

BOUEGEOISIE  AND  PROLETAEIAT. 

1  HE  history  of  society  in  the  past  is  the  history  of  class 
struggles.  Freemen  and  slaves,  patricians  and  plebians,  nobles 
and  serfs,  guild  members  and  journeymen — in  short,  oppressors 
and  oppressed,  have  always  stood  in  direct  opposition  to  each 
other.  The  struggle  between  them  has  sometimes  been  open, 
sometimes  concealed,  but  always  continuous.  A  never  ceasing 
struggle,  which  has  invariably  ended,  either  in  a  revolutionary 
alteration  of  the  social  system,  or  in  the  common  destruction  of 
the  contending  classes. 

In  earlier  historical  epochs  we  find  almost  everywhere  a 
minute  division  of  society  into  classes  or  castes — a  variety  of 
grades  in  social  life.  In  Ancient  Rome  we  find  patricians, 
knights,  plebians,  slaves;  in  Medieval  Europe,  feudal  lords, 
vassals,  burghers,  journeymen,  serfs;  and  in  each  of  these  classes 
here  were  again  grades  and  distinctions. 

Modern  bourgeois  society  which  arose  from  the  ruins  of  the 
ieudal  system  has  not  wiped  out  the  antagonism  of  classes. 
New  classes,  new  conditions  of  oppression,  new  modes  and  forms 
oF  carrying  oh  the  struggle,  have  been  substituted  for  the  old 
ones.  The  charateristic  of  our  epoch — the  epoch  of  the  bourgeoisie, 
or  middle  class — is  that  the  struggle  between  the  various  social 
classes  has  been  reduced  to  its  simplest  form.  Society  tends  more 
and.  more  to  be  divided  into  two  great  hostile  classes — the 
Bourgeoisie  and  the  Proletariat. 

From  the  serfs  of  the  middle  ages  sprang  the  burgesses  of 
the  early  Communes;  and  from  this  municipal  class  were  devel- 
oped the  first  elements  of  the  Bourgeoisie.  The  discovery  of 
America,-  the  circumnavigation  of  Africa,  gave  the  bourgeoisie 
or  middle  class — then  coming  into  being — new  and  wider  fields 
of  action  The  colonization  ot  America,  the  opening  up  of  the 
East  Indian  and  Chinese  markets,  the  colonial  trade,  the  increase 


SOCIALISM  373 

may  find  the  claims  of  socialism  ably  set  forth  and  ably  defended. 
Two  of  them  we  may  properly  examine  at  this  point.      (1) 
Marx  insisted  that  laborers  produced  much  more  than  they  re- 
ceived in  the  form  of  wages.     This  excess  he  called  surplus  value.  "^ 
What  he  really  meant  was  that  the  two  shares  in  distribution, 
profits  and  interest,  were  really  portions  of  wages  withheld 
from  labor.     (2)  Marx  also  held  the  view  that  the  interests  of    ^ 
capital  and  labor  could  never  be  reconciled.     Hence  he  speaks 
of  the   "  inevitable   conflict  ''   between  these   two  factors  in 
production.     He  believed,  and  his  followers  hold  the  same  view, 
that  it  is  only  a  question  of  time  until  the  laborers  of  the  world 
would  be   compelled   to   crush   capitalism.     Hence,   they  are 
inclined  to  oppose  any  schemes  that  have  for  their  end    the  / 
reconciliation  of  capital  and  labor.     Here  we  have  the  reason 
for  the  inability  of  socialism  and  organized  labor  to  agree. 
Organized  labor  recognizes  the    mportance  of  the  employer  in  , 
industry.     Moreover,  its  efforts  oxe  directed  to  the  betterment 
of   the   working    classes,  and  hence,  a  postponement  of  the 
"  inevitable  conflict." 

Socialism  in  operation.  —  The  usual  argument  advanced 
against  any  proposal  for  the  government  regulation  of  industry 
is  that  it  is  socialistic.  Every  legislative  act  of  Congress  which 
has  had  for  its  end  government  interference  in  enterprise  has 
been  bitterly  attacked  on  this  ground.  Yet  strange  as  it  may 
appear,  what  is  socialistic  in  one  generation  is  likely  to  become 
a  settled  and  widely  accepted  policy  in  the  next.  When  the 
national  government  decided  in  1887  to  regulate  interstate  com- 
merce, many  well-meaning  persons  thought  they  saw  the  begin- 
ning of  a  socialistic  state.  Forty  years  of  practice  have  pro- 
duced a  change.  No  longer  is  there  any  opposition  to  the 
principle  embodied  in  regulating  railroads.  This,  however, 
is  but  a  single  illustration ;  it  might  be  duplicated  almost 
indefinitely.     From  Congress,  the  state  legislature,  and  city 


374  ELEMENTARY   ECONOMICS 

councils  there  issues  forth  a  constaut  stream  of  so-called 
socialistic  legislation;  that  is,  legislation  which  gives  society 
more  complete  control  over  the  factors  of  production.  The 
longest  step  in  this  direction,  taken  to  be  sure  as  a  war  measure, 
occurred  in  December,  1917,  when  President  Wilson,  acting 
under  authority  conferred  on  him  by  Congress,  took  charge  of 
the  railroads  of  the  country.  Whatever  our  notions  about 
socialism  may  be,  whether  we  favor  its  doctrines  or  oppose  them, 
we  cannot  shut  our  eyes  to  the  fact  that  society  is  more  and  more 
intervening  in  the  affairs  of  private  industry. 

86.   Criticisms  of  the  Socialistic  Program 

Character  of  human  motives.  —  Criticism  of  the  socialistic 
program  may  be  made  on  several  different  grounds.  Even  those 
who  are  inclined  to  be  friendly  toward  the  views  of  socialism 
feel  that  socialistic  leaders  have  minimized  the  importance  of 
the  motives  which  cause  the  «normal  individual  to  exert  himself 
economically.  Here  no  doubt  is  a  source  of  weakness,  for 
socialists  seem  to  take  too  much  for  granted.  They  see  modern 
industrial  society  as  it  is  now  constituted  with  its  various  groups 
of  workers,  its  enterprisers,  ■  and  its  capitalists.  They  see 
large  income  streams  flowing  into  the  pockets  of  the  last  two 
groups.  Perhaps  they  see  also  the  skill  of  the  enterprisers 
and  the  sacrifice  of  the  savers  of  capital.  Back  of  all  of  the 
labor,  the  skill,  and  the  sacrifice  is  the  desire  to  possess  goods. 
If  socialism  meant  nothing  more  than  a  socialization  of  pro- 
duction, little  objection  could  be  urged  against  it  by  those  who 
sympathize  with  its  aims.  May  it  not  mean  more  than  merely 
a  socialization?  May  it  not  also  mean  the  destruction  of  the 
force  that  drives  men  to  their  best  endeavors,  not  only  enter- 
prisers but  laborers?  May  it  not  ultimately  undermine  the 
very  industrial  structure  which  modern  society  has  erected? 
These  are  pertinent  questions  which  demand  attention  and 


SOCIALISM 


375 


even  serious  consideration ;  for  the  first  step  in  socialism,  if  it 
be  decided  to  give  it  a  trial,  may  be  to  reshape  human  nature  — 
that  is,  to  destroy  individual  selfishness. 

The  institution  of  private  property.  —  A  second  obstacle  to 
the  socialistic  goal  is  the  institution  of  private  property.     For 


Copyright  Underwood  dc  Underwood.  New  York 

Soldiers  and  Sailors  Breaking  up  a  Socialist  Meeting 
(in  Boston,  Mass.). 


centuries  individuals  the  world  over  have  been  accustomed  to 
hold  various  forms  of  property  to  the  exclusion  of  all  the  rest 
of  mankind.     Each  one  speaks  of  his  land,  his  money,  or  his 


376  ELEMENTARY   ECONOMICS 

goods.  No  other  race  of  people  has  held  so  stubbornly  to  this 
principle  as  have  the  English,  who  insist  that  a  man's  house  is 
his  castle.  For  the  individual  to  give  up  his  property  rights  to 
society  is  beyond  the  conception  of  the  ordinary  man.  It  is 
doubtful  if  more  than  a  scant  few,  all  avowed  socialists,  would 
subscribe  to  such  a  principle.  The  assumption  might  be  drawn 
from  what  has  just  been  said  that  socialism  is  opposed  on  the 
ground  that  practically  every  one  in  this  country  owns  property 
which  a  socialistic  state  would  take  over.  Such,  however,  is 
not  the  case,  for  in  so  far  as  land  is  concerned  more  than  one- 
half  of  the  people  of  the  United  States  are  propertyless.  Why, 
then,  we  may  ask,  do  not  those  who  would  profit  under  socialism 
immediately  vote  to  adopt  the  system?  The  answer  is  easily 
given  when  once  we  really  understand  human  nature.  First, 
the  great  bulk  of  men  have  never  questioned,  even  in  their  own 
minds,  the  sanctity  of  private  property  rights.  Second,  the 
typical  propertyless  individual  hopes  some  day  to  possess 
property  of  his  own.  Here,  as  in  the  case  of  economic  motives, 
considerable  education  will  be  needed  before  any  thorough- 
going socialistic  program  can  be  carried  out.  A  broad  education 
it  must  be,  which  will  emphasize  the  superior  needs  of  society, 
the  subordination  of  individual  rights  to  social  rights,  and  the 
spiritual  admonition  that  it  is  more  blessed  to  give  than  to 
receive. 

Diflaculties  of  administration.  —  Assuming  that  a  state  has 
advanced  to  the  point  where  its  members  are  willing  to  exert 
themselves  just  as  efficiently  as  they  do  now  and  to  give  up, 
portions,  at  least,  of  their  private  property  to  the  state,  there 
would  still  remain  serious  administrative  problems.  Capital 
would  be  just  as  necessary  under  the  new  condition  as  under 
the  old.  Enterprising  skill  could  not  be  dispensed  with. 
Some  one  would  have  to  make  decisions  as  to  amount  and 
character  of  output,  and  to  methods  of  distribution.    What 


SQCIALISM  377 

particular  goods  shall  be  produced?  in  what  quantity?  how 
much  shall  be  paid  to  each  workman  ?  how  much  shall  the  enter- 
priser get?  The  number  of  questions  of  this  character  which 
we  might  raise  is  limitless.  The  mere  fact,  however,  that 
socialists  cannot  answer  any  one  or  all  of  such  questions  does 
not  necessarily  condemn  the  socialistic  program.  Every  new 
program  must  face  the  same  difficulty.  It  is  doubtful,  for 
example,  if  Jefferson,  or  Franklin,  or  any  other  one  of  the 
men  who  drew  up  the  Constitution  of  the  United  States  in 
1787,  could  have  answered  one-tenth  of  the  questions  which 
have  s'nce  confronted  the  national  government.  Simply  be- 
cause we  cannot  see  how  each  detail  is  to  be  carried  out  in  a 
socialistic  state,  is  not  sufficient  ground  on  which  to  reject 
socialism.     Our  final  judgment  must  be  based  on  more  evidence. 

87.   Some  Substitutions  for  Socialism 

Government  regulation.  —  Earlier  in  the  chapter  mention 
was  made  of  the  fact  that  society  in  this  country  has  under- 
taken a  variety  of  industrial  activities  which  show  unmistakable 
tendencies  toward  the  socialistic  program.  Socialists  them- 
selves say  that  these  undertakings  are  mere  substitutes  for 
socialism,  if  not  indeed  flimsy  makeshifts. 

The  most  outstanding  substitute  of  this  nature  is  government 
regulation.  We  have  already  seen  how  Congress  has  provided, 
in  the  Interstate  Commerce  Act  and  its  amendments,  for  regu- 
lating trade  among  the  states.  But  the  national  government 
has  gone  much  farther  in  this  respect.  We  have  anti-trust 
laws,  child-labor  laws,  pure-food  laws,  drug  laws,  laws  regulating 
the  inspection  of  meat  products,  government  manufactures  of 
war  materials,  and  public  shipyards.  Our  participation  in  the 
Great  War  compelled  uiiheard-of  regulative  measures  in  pro- 
duction. Raw  materials  were  apportioned  among  manu- 
factures, the  country  experienced  "  coalless  "  days,  while  even 


378  ELEMENTARY   ECONOMICS 

consumers  were  told  what  they  might  eat.  Since  government 
regulation  seems  to  be  the  first  step  toward  government 
ownership  and  government  operation,  all  such  regulative  meas- 
ures are  regarded  by  many  with  grave  apprehension. 

Government  cooperation.  —  The  government  has  also  co- 
operated in  some  industries.  The  most  familiar  example  in  this 
respect  is  the  ship  subsidy,  whereby  the  government  for  a 
nominal  economic  service  pays  to  shipowners  stated  sums  of 
money  in  order  to  encourage  shipbuilding  and  ship  operations. 
Irrigation  is  another  example.  Here  the  government  builds 
storage  basins  from  which  it  supplies  water  to  farmers  in  the 
near-by  regions.  In  other  words,  the  government  cooperates 
in  production.  Obviously,  grave  dangers  lurk  in  government 
cooperation,  for  to  open  the  government  purse  to  the  hands  of 
private  individuals  on  the  pretense  of  public  welfare,  is  a 
temptation  sometimes  difficult  to  resist. 

The  problem  of  government  operation.  —  Our  government  has 
had  too  little  experience  in  the  operation  of  industry,  to  permit 
of  any  judgment  being  formed  as  to  the  merits  of  government 
ownership.  We  have  conducted  the  post  office  with  a  fair 
degree  of  efficiency,  and,  much  to  the  surprise  of  many  people, 
the  national  government  dug  the  Panama  Canal  at  an  enormous 
cost  free  from  suspicion  of  graft  or  political  jobbery.  Could  we 
hope  to  carry  on  other  industries  with  the  same  measure  of  suc- 
cess? Some  say.  Yes ;  others.  No.  Neither  side  has  much  data 
on  which  to  base  conclusions.  Those  who  answer  yes,  point 
to  the  success  of  the  post  office  as  an  evidence  of  government 
efficiency.  Those  who  answer  no,  lay  stress  on  the  temptation 
of  public  officials  to  be  careless  with  public  affairs.  They  direct 
attention  to  the  "  pork-barrel "  practices  of  making  appropria- 
tions for  public  improvements,  and  from  this  fact  they  conclude 
that  industry  in  general  would  be  in  grave  danger  if  directed  by 
the  government.    Government  operation  is  likely  to  become 


SOCIALISM  379 

increasingly  important  as  a  social  problem,  and  for  that  reason 
it  is  our  duty  to  give  careful  attention  to  its  solution. 

EXERCISES   AND   PROBLEMS 


1.  Why  may  socialism  be  considered  a  distributive  problem? 

2.  May  it  be  also  a  productive  problem?     Explain. 

3.  Whj^  should  every  one  carefully  examine  the  claims  of  socialism  ? 

4.  Account  for  the  hazy  notions  many  people  have  concerning 
socialism. 

5.  Do  socialists  look  forward  to  an  equal  distribution  of  wealth?  of 
income  ? 

6.  What  essential  beliefs  diAdde  socialists  into  groups  ? 

7.  Just  what  did  Marx  mean  by  the  expression,  "surplus  value"? 

8.  Do   socialists  urge  friendly  relations  between  employer  and 
employee?     Why,  or  why  not? 

9.  What  human  motives  hinder  socialism  ? 

10.  What  is  meant  by  the  expression,  "the  institution  of  private 
property"? 

11.  What  administrative  problems  would  confront  a  socialistic 
state? 

12.  What  important  present-day  questions  of  production  would 
persist  unde^  socialism?     . 

13.  Why,  or  why  not,  may  we  justly  demand  that  the  solution  of 
every  administrative  problem  be  pointed  out  before  we  give  a  respectful 
hearing  to  the  principles  of  socialism? 

14.  What  is  a  substitute  for  socialism? 

B 

1.   Consult  with  some  well-known  socialist  in  your  community. 
a.  Ask  him  about  the  socialistic  attitude  toward  present-day 

production,  consumption. 
h.  Get  his  opinion  on  the  trend  of  public  thought  regarding 
socialism  since  1910. 

c.  Inquire  concerning  the  administrative  difficulties  socialism  is 

likely  to  meet. 

d.  Get  his  views  on  the  relation  of  socialism  to  organized  labor. 


380  ELEMENTARY   ECONOMICS 

e.   Learn   the   general   attitude   which   socialism   takes   toward 
religion,  education,  marriage,  charity. 

2.  Inquire  at  random  among  older  acquaintances  concerning  their 
notions  of  socialism. 

a.  How  many  of  the  whole  number  appear  to  have  given  socialism 

any  serious  thought? 
h.  How  many  appear  to  have  fixed  convictions  on  the  subject? 
c.   From  your  experience  in  this  connection,  what  would  you  say 

regarding   the   general   attitude   of   the   American   public 

toward  socialism? 

3.  Confer  with  the  best-informed  anti-socialist  in  the  community 
and  get  his  reaction  on  the  claims  made  by  your  socialistic  friends. 
Then  you  will  be  in  a  fairly  good  position  to  think  for  yourself. 

4.  Analyze  the  answers  of  the  business  men  to  whom  you  put  the 
following  questions : 

a.  What  is  the  origin  of  private  property? 
h.  Why  should  an  individual  be  permitted  to  own  and  control 
private  property? 

c.  Would  you  favor  the  socialization  of  all  private  property? 

d.  How  would  such  a  change  affect  society?  industry? 

5.  List  any  arguments  you  may  think  important  in  support  of  the 
government  ownership  of  railroads.     List  also  opposing  arguments. 


1.  How  would  you  expect  a  change  to  socialism  tcf   affect    the 
following : 

a.  Farming? 

b.  Plumbing? 

c.  Retailing? 

d.  Manufacturing? 

e.  Teaching  ? 
/.    Preaching  ? 

g.   Professional  begging? 

h.  Lending  money  ? 

i.    Renting  residence  houses? 

j.    Coal-mining  ? 

k.  Professional  singing? 

2.  Imagine  a  system  of  socialism  in  operation  in  this  country, 
o.  What  problems  concerning  production  might  arise? 


SOCIALISM  381 

h.  How  would  society  be  able  to  secure  the  services  of  skilled 
enterprisers  ? 

c.  From  what  source  would  capital  come? 

d.  What  would  determine  the  wages  of  plumbers,  carpenters, 

unskilled  workers  ? 

3.  To  what  extent,  if  at  all,  are  the  following  socialistic : 

a.  Maintenance  of  free  public  schools  ? 

b.  Regulation  of  street-car  fares  ? 

c.  City  ownership  -of  a  gas  plant? 

d.  Fixing  the  price  of  wheat? 

4.  Explain  just  why  socialism  should  oppose  labor  strikes,  coopera- 
tion, profit-sharing,  social  insurance. 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pages  494r-513e 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  627-640. 

Fetter,  Economics,  Vol.  II,  pages  470-490. 

Fisher,  EUmentary  Principles  of  Economics,  pages  35,  36,  369-371. 

Seager,  Principles  of  Economics,  pages  613-627. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  64,  136,  655-658. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  II,  pages  443-478. 


CHAPTER  XXVIII 
SOCIAL   INSURANCE 

88.    The  Risks  of  Industry 

Nature  of  the  risks.  —  One  of  the  most  outstanding  features 
of  modern  industry  is  the  constant  risk  to  which  laborers  are 
exposed.  Equally  important  is  the  inability  of  the  laborer 
either  to  avoid  the  risk  or  to  bear  the  financial  burden  which  it 
may  incur.  We  usually  associate  risks  of  industry  with  acci- 
dents such  as  cuts,  burns,  bruises,  or  even  death.  But  risk, 
every  laborer  knows,  has  a  wider  application.  Sickness  from 
natural  causes,  overwork,  or  exposure,  stares  him  constantly  in 
the  face.  His  ''  job  "  is  insecure  at  the  best,  while  old  age  can 
be  forestalled  only  by  premature  death  itself.  Any  one  of 
these  calamities,  if  long  continued,  endangers  the  worker's 
independence  and  tends  to  demoralize  him.  What  to  the  well- 
to-do  and  the  rich  may  appear  as  trifles,  loom  large  in  the 
experiences  of  the  mass  of  labor.  An  accident,  a  few  weeks' 
illness,  or  a  month's  idleness  means  self-denial  on  the  part  of 
every  member  of  the  family.  Many  an  industrious  worker  has 
struggled  for  years  only  to  find  from  time  to  time  his  scant 
savings  swept  away  in  doctor  bills.  Even  though  he  be  for- 
tunate in  these  respects  there  still  remains  old  age  with  its  lower 
earning  power,  its  dependence,  its  aches  and  pains.  Few 
laborers  above  the  age  of  sixty-five  are  independent,  the  great 
majority  of  them  depending  more  or  less  on  relatives,  friends, 
or  public  charity. 

382 


SOCIAL   INSURANCE  383 

Inability  of  individuals  to  carry  risks.  —  Since  it  is  a  self- 
evident  fact  that  workers  are  endangered  on  every  hand,  why- 
do  they  themselves  not  adequately  prepare  for  enforced  idleness 
or  old  age  ?  A  complete  answer  involves  many  considerations. 
First,  a  worker,  like  other  people,  gives  little  thought,  as  long 
as  he  is  well  and  strong,  to  accident,  sickness,  or  old  age.  He 
sees  no  need  for  taking  measures  against  a  calamity  that  may 
never  come.  His  greatest  concern  is  in  his  immediate  task. 
Present  wants  obscure  future  demands.  Suppose,  however, 
that  the  typical  American  workman,  realizing  the  risks  to 
which  he  was  exposed,  should  decide  to  save  enough  to  tide  him 
over  periods  of  sickness  or  idleness,  or  even  to  maintain  him  in 
decency  during  his  old  age.  Even  then  it  is  doubtful  that  he 
would  succeed,  for  no  system  of  budgets  yet  devised  for  the 
workers  shows  any  surplus  above  present  needs,  large  enough 
for  such  a  purpose.  The  simplest  calculation  shows  that  family 
incomes  of  five  or  six  hundred  dollars  a  year  are  too  slender 
to  permit  of  savings  of  any  consequence.  For  the  same  reason 
our  worker  carries  little  or  no  insurance  against  loss,  even  where 
insurance  is  possible.  The  two  chief  obstacles  to  individual 
protection,  therefore,  are  lack  of  foresight  and  lack  of  funds. 
Either  alone  is  of  no  avail. 

Arguments  for  social  insurance.  —  If  the  individual  will  not 
or  cannot  protect  himself  against  industrial  mishaps,  it  is  the 
duty  of  society  to  come  to  his  aid.  Society  has  a  varied  interest 
in  the  welfare  of  its  workers.  First,  the  workers  are  members  of 
society.  Second,  society  in  the  long  run  does  provide  for  all. 
Third,  society  enjoys  the  product  of  labor.  We  have  learned 
already  that  the  interests  of  society  are  best  promoted  by  giving 
attention  to  the  interests  of  its  individual  members.  Any 
large  group  of  dependents,  we  may  safely  assume,  is  a  menace  to 
the  social  group  of  which  they  are  a  part.  Furthermore,  it  is 
doubtful  if  society  as  a  whole  would  be  more  greatly  hindered 


384  ELEMENTARY   ECONOMICS 

if  some  form  of  insurance  were  provided  in  place  of  the  prev- 
alent haphazard  methods  now  employed  in  our  charity  work. 
It  is  a  fact  generally  overlooked  that  nowhere  in  this  country 
do  the  authorities  intentionally  permit  individuals  to  starve 
or  to  go  unattended  if  aged  or  ill.  In  other  words,  our  state- 
regulated  charities  guarantee  a  minimum  of  food,  clothing,  and 
shelter.  Since  this  is  true,  the  question  may  be  raised  :  Why 
change  the  plan  now  in  general  use  ?  A  change  is  desirable  if 
for  no  other  reason  than  to  make  the  recipient  feel  that  he  is 
not  an  object  of  charity,  but  an  unfortunate  partner  in  a  mutual 
protective  concern  controlled  by  the  state.  Finally,  it  is 
doubtful  if  a  well-regulated  insurance  scheme  that  provides 
contentment  as  well  as  protection  would  in  the  long  run  cost 
society  a  dollar.  Workers  free  from  worry  turn  out  more  prod- 
uct than  those  who  fear  tp  take  a  day  off  with  a  day's  loss  of 
wages  or  those  who  return  to  work  before  they  are  physically 
fit.  In  any  case  society  as  such  consumes  the  product  of  labor 
and  ought  out  of  sheer  justice  to  be  willing  to  protect  laborers 
against  risks  for  which  they  themselves  are  not  responsible. 

Risk  an  element  in  costs  of  production.  —  Employers  have 
generally  protested  against  social  insurance  on  the  ground  that 
the  payments  they  are  called  on  to  make  are  an  unbearable 
burden.  Every  one  of  these  same  employers  provides  for  the 
wear  and  tear  on  buildings  and  machinery  by  setting  aside  what 
is  known  as  the  replacement  fund.  When  a  steam  boiler,  for 
example,  is  no  longer  fit  for  use,  he  buys  a  new  one  from  this 
fund.  We  may  properly  inquire  as  to  the  source  of  this  fund. 
Production,  we  have  already  learned,  merely  means  creation  of 
utilities.  The  obsolete  steam  boiler  has  been  transformed,  so 
to  speak,  into  shoes,  hats,  cloth,  or  whatever  else  the  finished 
product  of  that  particular  factory  happens  to  be.  Obviously,  the 
price  of  the  finished  product  must,  under  normal  conditions 
and  in  the  long  run,  be  large  enough  to  provide  for  deterioration 


SOCIAL   INSURANCE 


385 


Copyrioht  Underwood  &  Underwood,  New  York 

Building  a  Modern  Skyscraper. 


386  ELEMENTARY   ECONOMICS 

in  instruments  of  production.  Otherwise  the  world  would  soon 
Ix;  out  of  such  instruments.  Why  should  a  distinction  be  made 
between  a  worn-out  machine  and  a  worn-out  worker  ?  If  society 
can  afford  to  repair  and  replace  steam  boilers,  why  may  it  not 
afford  to  doctor  its  sick  and  injured,  and  to  pay  at  the  end  of  a 
worker's  life  a  lump  sum  to  his  dependents?  The  world,  as 
we  shall  see  in  the  following  paragraphs,  is  fast  coming  to 
believe  that  society  cannot  escape  the  responsibility;  that 
is,  that  prices  must  be  high  enough  to  care  for  a  portion,  at 
least,  of  the  costs  of  labor  upkeeps. 

89.   Kinds  of  Social  Insurance:    Europe 

Accident  insurance.  —  Of  the  various  kinds  of  social  in- 
surance the  most  important  in  many  respects  is  accident  in- 
surance. In  1884  Germany  provided  that  employers  must  form 
mutual  accident  insurance  associations,  which  should  collect 
dues  from  employers  and  pay  benefits  to  victims  of  accidents  or, 
in  case  of  death,  to  the  family  of  the  deceased.  The  employers 
themselves  manage  the  affairs  of  their  respective  associations, 
though  the  German  government  through  its  Imperial  Insurance 
Office  exercises  a  certain  amount  of  oversight  and  acts  as  a 
mediator  in  all  cases  where  an  injured  employee  is  dissatisfied 
with  the  award  made  by  one  of  the  associations.  Ten  years 
later  Norway  instituted  a  government-controlled  system  of 
accident  insurance.  The  employers  of  that  country  pay  into  a 
state  insurance  fund  premiums  which  are  based  on  the  size  of 
jvages  and  the  degree  of  risk  to  which  each  employee  is  exposed. 
The  state  itself  administers  the  funds,  paying  the  victims  of 
accidents  according  to  a  carefully  prepared  scale.  In  1897  an 
English  law  provided  that  employers  should  be  liable  for 
accidents  to  their  employees,  but  it  did  not  provide  that  em- 
ployers should  organize  for  mutual  protection;  that  is,  each 
employer  could  insure  his  men  against  accident  in  some  insur- 


SOCIAL   INSURANCE  387 

ance  society,  or,  if  he  preferred,  carry  his  own  risk.  One  of 
these  three  methods  has  been  adopted  in  practically  every 
European  country. 

The  administration  of  accident  insurance  is  fairly  easy.  In 
Germany,  the  benefits  paid  during  the  first  thirteen  weeks 
following  an  accident  come  from  a  sick  fund,  which  the  em- 
ployees themselves  must  largely  provide.  Obviously,  the  object 
of  this  scheme  is  to  restrict  the  use  of  the  funds  of  the  employers' 
associations  to  those  who  suffer  from  serious  accidents.  Besides, 
since  the  first  thirteen  pa3Tnents  come  largely  out  of  the  pockets 
of  the  employees,  there  will  be  less  temptation  for  an  employee 
to  pretend  to  be  injured  in  order  to  get  a  few  weeks'  rest. 

Insurance  against  illness  and  old  age.  —  The  German  plan  of 
insuring  against  illness  was  instituted  in  1883.  There  the  state 
requires  each  employer  to  purchase  weekly  from  the  post  office, 
insurance  stamps  for  each  of  his  employees.  At  least  one-third 
of  the  cost  of  the  stamps  must  be  contributed  by  the  employer, 
who  may,  if  he  chooses,  deduct  the  other  two-thirds  from  his 
employees'  wages.  Should  an  employee  become  ill  he  has  his 
stamps,  which  are  fastened  to  insurance  cards,  as  evidence  that 
he  is  insured.  The  provisions  of  the  German  law  cover  many 
different  aspects  of  illness.  (1)  Naturally  the  first  provision 
is  for  free  medical  attention.  In  case  of  serious  accidents,  such 
as  the  loss  of  a  leg  or  an  arm,  the  state  supplies  artificial  Hmbs. 
(2)  Free  hospital  service  is  also  furnished  where  necessar>^,  and 
special  attention  is  given  to  hospitals  for  young  mothers  and 
babies.  (3)  One-half  of  the  wages  of  an  ill  workman  are  paid 
for  a  maximum  period  of  six  months.  (4)  Finally,  small 
benefits  are  paid  to  the  dependents  of  deceased  employees. 
Germany  provides  also  for  compulsory  insurance  against  the 
hazards  of  old  age.  As  in  the  case  of  illness  employers  must 
affix  stamps  to  insurance  cards,  being  permitted  to  withhold 
at  most  one-half  of  the  amount  from  employees'  wages.     The 


388 


ELEMENTARY   ECONOMICS 


buying  of  stamps  begins  for  each  employee  at  the  age  of  sixteen. 
Benefits  are  first  paid  at  the  age  of  seventy,  or  earlier  to  those 
who  are  totally  incapacitated  for  labor.  Both  the  premiums  on 
the  insurance  and  the  benefits  paid  to  the  insured  are  relatively 
small.  The  first  average  only  a  few  cents  each  week  (3^  to  9) 
while  the  latter  average  approximately  one  dollar  a  week. 


Copyright  Jnli  nuaiunal  Fih 


Si  rvice,  .\cu-  Yark. 

Feeding  the  Unfortunate. 


Here  we  see  homeless  men  being  fed  at  public  expense. 

Great  Britain  has  also  provided  insurance  against  illness 
(1912)  and  old  age  (1908).  In  each  case  the  British  law  is 
similar  to  that  of  Germany.  British  employers  must  purchase 
illness  insurance  stamps  for  their  emplo3^ees,  the  two  groups 
sharing  about  half  and  half  in  their  cost.  The  benefits  resemble 
the  benefits  under  the  German  system,  the  chief  features  being 


SOCIAL   INSURANCE  389 

free  medicine,  free  hospital  service,  and  weekly  sick  benefits 
($2.50  for  men  and  $1.75  for  women).  Under  the  British  old- 
age  pension  law  any  wage-earner  of  that  country,  when  he 
reaches  the  age  of  70,  is  entitled  to  a  small  pension  if  he  can 
prove  that  he  has  lived  in  Great  Britain  during  the  past  twenty- 
six  years  and  does  not  already  have  an  annual  income  exceeding 
about  $150. 

Insurance  against  unemployment.  —  The  most  difficult  of  all 
forms  of  social  insurance  to  administer  is  unemployment  insur- 
ance. Dishonest  employees  may  pretend  to  be  ill  or  injured 
only  at  the  risk  of  having  their  dishonesty  easily  detected.  In 
the  matter  of  unemployment,  however,  the  situation  is  different. 
No  human  agency  yet  devised  could  successfully  distinguish 
between  inability  to  find  work  and  laziness.  For  that  reason 
unemployment  insurance  has  lagged  behind.  In  the  Belgian 
city  of  Ghent,  however,  the  trade  unions,  assisted  by  donations 
from  the  city  treasury,  have  undertaken  to  pay  small  benefits 
to  the  unemployed.  Since  the  unions  themselves  are  vitally 
interested  in  the  money  they  pay  out,  abuse  of  the  benefits  on 
the  part  of  the  dishonest  is  reduced  to  a  minimum.  Great 
Britain  has  undertaken  in  a  much  more  ambitious  way  to  insure 
against  unemployment.  There  employment  bureaus  supported 
by  the  state  attempt  to  keep  unemployed  labor  moving  in  the 
direction  of  jobs.  Certain  trades  enjoy  special  protection 
against  unemployment.  In  these  trades  employers  must  pro- 
vide each  employee  with  stamped  cards,  which  guarantees,  in 
case  of  unemployment,  a  small  benefit  of  $1.75  a  week  for  a 
maximum  of  fifteen  weeks. 

90.   Progress  and  Outlook  of  Social  Insurance 
IN  THE  United  States 

Constructive  legislation.  —  The  only  important  step  taken  in 
this  country  toward  state  regulation  of  social  insurance  has 


390  ELEMENTARY   ECONOMICS 

been  in  connection  with  industrial  accidents.  Until  recently  the 
old  common  law,  which  lays  a  great  deal  of  responsibility  for 
accidents  on  the  employees  themselves,  was  in  full  force.  Under 
this  law  an  injured  workman  had  no  legal  redress  against  his 
employer  if  it  could  be  proved  that  either  he  or  any  of  his 
fellow  employees  had  been  the  cause  of  the  accident.  Even 
when  the  employer  was  clearly  to  blame  it  was  almost  im- 
possible for  an  injured  employee  to  secure  damages,  owing  to  the 
heavy  costs  of  court  litigation.  Now  and  then  an  injured  em- 
ployee was  able  to  secure  a  large  damage  from  his  employer, 
but  this  was  the  exception  rather  than  the  rule.  Usually  also 
a  large  portion  of  such  awards  went  to  pay  legal  fees  and  court 
costs.  It  must  not  be  thought,  however,  that  the  employer 
had  no  worries  in  this  connection.  He  stood  in  constant  dread 
oi  being  sued  for  damages  resulting  from  accidents ;  and  the  fact 
that  he  usually  won  his  cause  in  court  carried  little  consolation, 
for  legal  successes  are  excessively  costly. 

It  is  little  wonder  then  that  Congress  as  well  as  various  state 
legislatures  finally  gave  attention  to  providing  compulsory 
accident  insurance.  In  1908  a  federal  law  provided  accident 
insurance  for  a  majority  of  the  industrial  employees  of  the 
government.  A  little  later  many  of  the  states  took  steps  to 
protect  privately  employed  workmen.  The  result  has  been  that 
more  than  one-half  of  the  states  have  workmen^ s  compensation 
laws.  Naturally  these  laws  vary  in  detail,  yet  they  possess  in 
general  three  characteristics:  (1)  protection  for  workers  in 
hazardous  occupations,  (2)  little  or  no  responsibility  for  acci- 
dents placed  on  employees,  (3)  costs  of  maintaining  insurance 
imposed  on  employers.  In  some  of  the  states,  employers  must 
provide  accident  insurance  for  their  employees.  In  others  it  is 
a  matter  for  employers  and  their  employees  to  decide  ;  usually 
with  the  provision  that  the  Refusal  of  either  party  to  enter 
into   such  voluntary  arrangements  as  were  provided  by  the 


SOCIAL   INSURANCE 


391 


Covyrtght,  Underwood  &  Underwood,  New  York. 

Dependent  on  Charity. 
Numerous  private  organizations  assist  in  caring  for  dependent  members. 


392  ELEMENTARY   ECONOMICS 

state  puts  the   party  refusing  at  a  disadvantage   l)efore   the 
courts. 

A  comprehensive  program  for  social  insurance.  —  Leaders  of 
American  thought  have  given  careful  attention  to  the  question 
of  social  insurance  in  the  hope  of  being  able  to  formulate  a  set  of 
general  principles  for  the  guidance  of  legislatures  in  enacting 
workmen's  compensation  laws.  This  they  have  done :  the 
most  active  group,  the  American  Association  for  Labor  Legis- 
lation, has  indorsed  substantially  the  following  standards : 

A.  Compensation  — 
Medical  attendance. 
Two-thirds  of  regular  wages. 
$20.00  weekly  maximum. 
$5.00  weekly  minimum. 
Funeral  expenses. 
One-third  of  wages  to  widow. 

B.  Compensation  to  be  the  only  remedy  — 

Neither  employer  nor  employee  may  bring  suit  under  law   of 
negligence. 

C.  Exemptions  from  compensation  — 
Farm  laborers. 

Domestic  servants  — 

Hotels  and  restaurants  excepted.  •  * 

D.  Employers  given  option  as  to  methods  of  insurance  — 
Mutual  associations. 

Stock  companies. 
State  insurance. 

E.  Compensation  laws  administered  by  permanent  accident  board  — 

F.  Methods  of  settling  claims  — 
Arbitration. 

Accident  board.  • 

Th.i  program  is,  to  say  the  least,  an  ambitious  one.  It  has 
for  its  end  liberality  as  well  as  justice.  It  provides  for  the 
injured  workman  in  a  way  so  as  not  to  offend  his  sense  of  self- 
respect  ;   gives  employers  an  opportunity  to  choose  their  own 


SOCIAL   INSURANCE  393 

insurance  plan;    and  finally,  it  does  away  with  undue  risk, 
financial  uncertainty,  and  costly  litigation. 

The  outlook.  —  The  awakened  consciousness  of  the  people  to 
the  burdens  which  society  for  centuries  has  been  laying  on  its 
weakest  members  is  a  sign  of  social  health  and  social  progress. 
It  points  to  the  day  when  the  unfortunate  industrial  worker  can 
demand  as  a  right  the  financial  protection  of  society ;  a  day  when 
it  is  fully  recognized  that  it  is  just  as  important  to  provide  for 
wear  and  tear  on  men  as  for  depreciation  of  inanimate  machin- 
ery; a  day  when  the  strong  will  adequately  recognize  their 
responsibility  to  the  weak.  Social  obligations,  however,  are 
two-sided.  Workers  as  individuals  and  as  an  industrial  group 
cannot  escape  their  responsibility  to  the  larger  social  group.  All 
have  duties.  No  one  can  stand  aloof  from  the  crowd, 
mutual  understanding  of  the  rights  and  duties  of  each  is 
to  be  the  longest  step  to  be  taken  in  reaching  what  some 
sider  the  industrial  millennium. 

EXERCISES  AND   PROBLEMS 


1.  Why  are  manual  laborers,  more  than  others,  exposed  to  sickness, 
accidents,  and  death? 

2.  Just  how  expensive,  both  from  the  individual  and  the  social  view- 
point, is  each  of  these  forms  of  disability? 

3.  How  does  it  happen  that  such  a  large  proportion  of  old  people 
are  more  or  less  dependent  ? 

4.  Why  does  not  the  normal  individual  guard  himself  more  care- 
fully against  accident  and  sickness? 

5.  Can  the  typical  American  workman  afford  to  carry  any  great 
amount  of  life  or  accident  insurance  ?     Why,  or  why  not  ? 

6.  Why  should  society  undertake  the  protection  of  individuals? 

7.  Why  is  charity  inadequate? 

8.  Just  how  does  society  guarantee  a  minimum  to  every  individ- 
ual member  ? 


394  ELEMENTARY   ECONOMICS 

9.   Why  should  society  as  a  whole  replace  machines  and  not  men? 

10.  What  influence  did  the  autocratic  government  of  Germany 
have  on  the  development  of  social  insurance  among  the  Germans  ? 

11.  In  what  particular  respects  does  the  English  plan  of  social 
insurance  differ  from  the  German  plan  ? 

12.  What  are  the  outstanding  features  of  accident  insurance? 

13.  Why  has  social  insurance  developed  slowly  in  the  United  States  ? 

14.  Just  to  what  extent  have  we  gone? 

B 

1.  Call  to  mind  any  financial  distress  which  you  have  observed 
caused  by  accident  or  illness. 

a.  To  what  extent  was  the  laborer  responsible  for  his  own  accident 

or  illness? 
6.  Did  he  carry  accident  or  sickness  insurance?     What  kind? 

c.  Was  he  a  member  of  a  fraternal  order?     Which? 

d.  Did  his  employer  aid  him?     How? 

e.  Did  his  trade  union  assist  him  financially? 

/.    How  far,  if  at  all,  was  he  aided  by  organized  charity  ? 

2.  Investigate  any  organized  effort  that  is  being  made  in  your 
community  to  help  the  poor  and  unfortunate. 

a.  What  are  the  sources  of  financial  support? 

i.  To  what  extent,  if  at  all,  are  these  funds  raised  by  taxation  ? 
ii.  Enumerate  other  methods  of  raising  funds  (tag  days,  etc.). 

b.  What  is  the  attitude  of  the  people  who  are  helped  ? 

c.  How  is  pauperization  prevented  ? 

3.  Name  the  various  agencies  in  your  community  which  extend 
financial  assistance  to  the  distressed. 

a.  Which  are  religious  in  nature  ? 

h.  Which  emphasize  personal  visitation? 

c.  Which  have  membership  dues? 

d.  Which  are  purely  philanthropic  ? 

4.  Inquire  as  to  the  general  attitude  of  your  older  acquaintances 
toward  the  county  or  other  public  almshouse. 

a.  Does  any  stigma  attach  to  its  occupants?     Why,  or  why  not? 

b.  Does  any ,  one  take  the  view  that  it  is  merely  a  method  of 

guaranteeing  a  minimum  subsistence  to  each  member  of 
society?     Who?  _ 

c.  What  is  the  viewpoint  of  the  occupants  themselves  ? 


SOCIAL   INSURANCE  395 

5.  Look  about  for  other  means  of  extending  financial  assistance  to 
the  incapacitated : 

a.  Public  hospitals. 

b.  Government  pensions. 

c.  State  and  federal  houses  for  disabled  soldiers  and  sailors. 

d.  State  institutions  for  the  unfortunate. 

e.  Old  people's  homes  maintained  by  fraternal  organizations. 
May  we  consider  these  as  forms  of  social  insurance  ?      Why,  or  why 

not? 

C 

1.  The  assertion  is  often  made  that  each  individual  usually  has  it  in 
his  own  power  to  provide  against  the  dependency  of  old  age  by  saving 
systematically  during  his  productive  years. 

a.  Might  the  typical  American  workman  be  more  frugal?     How ? 

h.  What  other  factor  is  necessary  in  saving  ? 

c.   Calculate  the  annual  saving  necessary  for  40  years  to  insure 

an  income  of  $300  a  year  at  the  age  of  60  on  a  six  per  cent 

basis. 

2.  One  of  the  best-known  American  cartoonists  showed  recently 
the  attitude  taken  by  men -engaged  in  hazardous  occupations.  A 
structural  steel  worker  standing  on  a  narrow  beam  twenty  floors 
above  the  street  and  an  aeroplane  pilot  in  his  machine  a  thousand  feet 
above,  each  observing  the  other,  remarked  how  foolish  some  men  were 
in  taking  risks.  Why  did  each  minimize  his  own  risk  and  magnify 
the  risk  of  the  other? 

3.  Suppose  that  society  should  devise  some  plan  whereby  house 
painters  would  be  insured  by  the  public  against  accident,  sickness,  old- 
age  dependence,  and  unemployment. 

a.  Would  the  number  of  house  painters  tend  to  increase  or 

decrease  ?     Why  ? 

b.  How  would  the  wages  of  house  painters  be  affected  ? 

c.  What  would  be  the  probable  effect  on  the  cost  of  painting  a 

house  ? 

d.  In  what  way,  if  at  all,  would  taxes  be  affected? 

e.  Would  a  plumber's  income  be  changed  as  a  result?     How? 

4.  Would  you  class  the  following  as  forms  of  social  insurance : 

a.  Government  pensions? 

b.  Free  treatment  in  railroad  hospitals  ? 

c.  State  aid  for  the  blind  ? 


396  ELEMENTARY   ECONOMICS 

d.  Insane  hospitals? 

e.  Retiring  allowances  to  aged  preachers  ? 
/.   Teachers'  pensions? 

g.  Payments  from  a  firemen's  pension  fund? 

SUPPLEMENTARY   READING 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  57,  587-595. 

Fetter,  Economics,  Vol.  II,  pages  349-365. 

Seager,  Principles  of  Economics,  pages  598-612. 

Taussig,  Principles  of  Economics,  2d  ed.,  Vol.  II,  pages  323-345. 


CHAPTER  XXIX 

THE  SHARE  OF  THE  GOVERNMENT  IN  DISTRIBUTION 
(TAXATION) 

91.  Government  Revenues  and  Government  Expendi- 
tures 

Revenues  of  various  taxing  bodies.  —  The  number  of  taxing 
bodies  to  which  any  particular  individual  may  be  subject  varies 
from  a  few  to  twenty-five  or  thirty.  Farmers  as  a  rule  are  sub- 
ject to  only  four  or  five  such  bodies,  while  a  dweller  in  a  large 
city,  with  its  parks,  hospitals,  sewerage  system,  high  schools, 
city  colleges,  or  technical  schools,  and  with  numerous  other 
agencies  for  the  betterment  of  social  conditions,  finds  a  much 
greater  number  of  official  boards  which  have  authority  to  tax 
his  property.  Our  problem  will  be  much  simpUfied,  however,  if 
we  confine  our  attention  to  (1)  national  taxes,  (2)  state  taxes, 
and  (3)  local  taxes.  The  national  government  possesses 
practically  unlimited  power  in  the  matter  of  taxation,  and, 
strange  as  it  may  appear,  needs,  under  normal  conditions,  the 
least  revenue.  The  states  have  much  less  power  to  lay  taxes, 
though  their  needs  in  times  of  peace  are  greater  than  those  of 
the  national  government.  Finally,  local  needs  —  city,  school, 
county,  township — are  the  greatest  of  all ;  yet  they  must  be  sup- 
plied by  taxing  bodies  hedged  about  with  constitutional  or  statute 
restrictions.  In  most  states,  for  example,  the  taxing  power 
of  each  school  board  is  limited  to  a  small  per  cent  of  the  total 
wealth  in  the  school  district.  This  limitation  may  be  imposed 
by  constitutional  provision  or  by  legislative  enactment.     Similar 

397 


398  ELEMENTARY   ECONOMICS 

limitations  are  ve^  generally  placed  on  city,  county,  township, 
road,  bridge,  pai-k,  and  other  taxes.  We  should  be  warned  at 
this  point  that  the  emphasis  we  may  lay  on  the  restrictions  on 
local  taxing  boards  is  in  no  way  indicative  that  they  are  un- 
desirable, or  even  detrimental  to  the  best  interests  of  society. 

Receipts  and  expenditures  of  the  national  government.  — 
Since  the  second  year  of  the  Civil  War  the  receipts  of  the 
national  government,  aside  from  loans,  have  been  largely  derived 
from  import  (tariff)  and  excise  (internal  tax)  duties.  From 
approximately  sixty  million  dollars  in  1860  the  annual  ordinary 
receipts  of  the  national  government  rose  to  three  quarters  of  a 
billion  dollars  in  1914,  and,  under  the  stress  of  the  Great  War,  to 
something  like  eight  billion  in  1919.  The  expenditure  of  these 
vast  sums  has  taken  a  multitude  of  forms.  During  the  last 
year  prior  to  the  outbreak  of  the  War  in  Europe  in  1914  the 
ordinary  expenditures  were  as  follows : 

Civil  and  miscellaneous      .     .     .     .     .  $170,530,235.45 

War  Department 173,522,804.20 

Navy  Department 139,682,186.28 

Indians 20,215,075.96 

Pensions 173,440,231.12 

Interest  on  the  Public  Debt   ....  22,863,956.70 

Total  $700,254,489.71 

It  is  to  be  noticed  that  federal  expenditures  are  undertaken 
primarily  for  national  defense  ;  that  is,  the  federal  government 
assumes  the  duty  of  protecting  state  and  local  governmental 
units  from  foreign  interference,  leaving  them  free  to  manage 
their  own  affairs :  about  70  per  cent  of  the  entire  expenditures 
go  directly  or  indirectly  to  war  purposes. 

State  and  local  expenditures.  —  State  expenditures  go  largely 
to  the  militia,  to  schools,  to  charitable  institutions,  and  to  the 
maintenance  of  the  courts.  Their  chief  sources  of  revenue 
are  real  estate  taxes,  and  license  fees  of  various  sorts.    The 


SHARE    OF   GOVERNMENT    IN    DISTRIBUTION      399 


last  few  years  have  seen  the  activities  of  the  states  in  these 
respects  grow  rapidly.     The  causes  are  obvious.     People  are 
more  and  more  coming  to  the  conclusion  that  the  state  govern- 
ment is  in  a  position  to  take  Over  many  so-called  private  func-*^ 
tions  at  a   material  saving  in  money   cost.     Nowhere  else, 

Expenses  of  the  Cities  of  the  United  States  for  Various 
Purposes:  1902-1912. 

PER  CENT 

0  20  40  60  RO         100 


1912 

191  I 

1910 

1909 

190 

1907 

1906 

1905 

1904 

1903 

1902 


^^^i®a«^555^llllll 


^?5S^^^5^?SJ^S^5?5^IIIIII 


^^^^^^^^^iyi^^^A  I M  M 


^^^^y^:^^^M'^yC:.<>\  Mill 


C:^-?^:^X5«<X>e<^S-lll  1 1 1 


^^m^s^^^^&^WW 


mm. 


I  yyy//j^^m^^s>mii!m 


I  TA^/zmmmr^s^^s^. 


:{'Z'X^^^^M^'^:^K^A  III  y////^mm^ss:^^wss9m 


EDUCATION 
POLICE  DEPARTMENT 
Z^^^i   GENERAL  GOVERNMENT 
HIGHWAYS 

CONSERVATION   OF   HEALTH 
FIRE  DEPARTMENT 
CHARITIES.HOSPITALS.AND  CORRECTIONS 


]   ALL  OTHER 


however,  have  receipts  and  expenditures  grown  as  in  the  local 
units.  The  incorporated  cities  of  this  country  spend  practically 
as  much  money  each  year  as  the  national  government  and  the 
forty-eight  state  governments  combined.  In  1914  the  budget 
of  the  city  of  New  York  equaled  approximately  the  total  of  all 
the  state  budgets  west  of  the  Mississippi  River.     In  1913 


400  ELEMENTARY   ECONOMICS 

the  per  capita  expenditures  of  cities  was  almost  thirty  dollars, 
while  the  same  item  for  state  expenditures  was  four  dollars, 
^and  for  the  national  government  ten  dollars.  Heavy  city 
expenditures  have  been  accompanied  in  too  many  cases  by 
extravagances  and  mismanagement.  The  influence  that  goes 
with  the  expenditure  of  municipal  funds  is  an  attraction  which 
few  local  politicians  can  resist.  It  means  patronage  and  hence, 
power.  Here,  then,  is  a  problem  which  must  be  confronted,  and 
unless  the  next  generation  aids  in  solving  it,  young  people  now 
being  educated  by  the  state  shall  not  have  returned  to  society  the 
full  measure  which  it  has  a  right  to  expect  from  its  heavy  invest- 
ments in  free  schools. 

Definition  of  a  tax.  —  It  will  add  to  clearness  of  the  subject, 
if,  at  the  outset,  we  distinguish  between  a  tax  and  two  other 
revenues  that  resemble  taxes.  "  A  tax  is  a  payment,  usually  in 
money,  exacted  hy  the  government  for  the  purpose  of  carrying  on 
public  enterprises  for  the  common  good.^^  It  will  be  noticed  that 
payment  is  compulsory,  and  that  expenditures  are  made  for 
the  benefit  of  society  as  a  whole.  Examples  are  the  general 
property  tax,  income  and  inheritances  taxes,  and  excises. 
Resembling  a  tax  somewhat  are  the  special  assessment  and  the 
fee.  As  its  name  suggests,  the  special  assessment  is  levied  for 
the  purpose  of  defraying  a  special  public  charge.  Professor 
Seligman  defines  it  as  "a  payment  made  once  for  all  to  defray 
the  cost  of  a  specific  improvement  to  property  undertaken  in  the 
public  interest,  and  levied  by  the  government  in  proportion  to 
the  particular  benefit  accruing  to  the  property  owner."  Of 
the  several  kinds  of  special-assessment  enterprises  the  best- 
known  is  the  construction  of  city  pavements.  The  same 
authority  defines  a  fee  as  "a  payment  to  defray  the  cost  of 
each  recurring  service  undertaken  by  the  government  primarily 
in  the  public  interest,  but  conferring  a  measurable  special 
advantage  on  the  fee  payer."     The  principle  underlying  the 


SHARE    OF   GOVERNMENT    IN    DISTRIBUTION      401 

fee  is  public  regulation,  though  individuals  that  pay  it  are 
usually  benefited.  Fees  are  charged  for  marriage  licenses, 
for  recording  of  deeds,  and  for  numerous  other  pubUc  services  of 
like  nature. 

92.   Bases  of  Taxation 

The  benefit  principle  of  taxation.  —  One  of  the  very  generally 
accepted  principles  of  taxation  is  that  taxes  may  be  levied 
according  to  the  benefits  derived ;  that  is,  the  amount  of  each 
person's  tax  should  correspond  to  the  services  which  society 
renders  him.  Obviously,  however,  such  a  principle  has,  in 
practice,  serious  limitations.  Sometimes  those  who- are  least 
able  to  pay  taxes,  need  most  the  state's  aid.  The  lower  income 
groups,  which  pay  a  relatively  small  share  of  the  school  taxes, 
are  the  most  highly  favored  by  public  education,  for  it  would 
be  cheaper  for  the  well-to-do,  in  lieu  of  paying  school  taxes,  to 
educate  their  own  children  in  private  schools.  The  truth  of 
this  statement  becomes  more  striking  when  we  consider  that 
the  property  of  unmarried  persons  and  childless  married 
couples  is  taxed  for  school  purposes  regardless  of  the  fact 
that  they  receive  no  direct  benefit  in  return.  It  has  only 
been  by  short  and  somewhat  halting  steps  that  American 
society  has  arrived  at  the  point  where  it  is  willing  to  abandon 
the  benefit  theory  in  levying  school  taxes.  Not  many 
years  ago  our  state  courts  were  "  swamped  "  with  suits  in- 
stituted by  property-owners  in  an  effort  to  be  relieved  from 
being  taxed  to  educate  other  people's  children.  In  fact,  in 
one  populous  Middle  Western  state  the  high  school  system  owes 
its  existence  to  the  legal  fiction  that  high  school  education  is 
authorized  by  the  statute  which  authorizes  "  common  school  " 
education.  Numerous  other  exceptions  may  be  found  to  the 
benefit  theory  of  taxation.  We  do  not  inquire  how  much  taxes 
an  individual  has  paid  when  we  admit  him  to  a  public  hospital, 


402  ELEMENTARY   ECONOMICS 

a  public  library,  or  to  a  public  park.  It  is  indeed  fortunate  for 
society  that  the  benefit  theory  has  been  partially  abandoned,  for 
it  fails  in  general  to  iliake  the  strong  l^ear  some  of  the  burdens 
of  the  weak.  Even  the  well-to-do  who  receive  no  direct  benefits 
from  school  taxes  profit  indirectly  and  in  the  long  run;  for 
public  education,  if  it  means  anything  at  all,  ought  to  stand  for 
a  more  enlightened  citizenship,  for  higher  industrial  eflSciency, 
and  for  greater  security  for  persons  and  property. 

The  ability  principle  of  taxation.  —  It  accords  more  with  our 
sense  of  justice  to  levy  taxes  according  to  ability  to  pay.  This 
policy  we  follow  in  asking  for  Y.  M.  C.  A.  and  Red  Cross  sub- 
scriptions, and  even  in  urging  the  people  to  purchase  government 
bonds.  But  there  is  also  an  economic  justification  for  com- 
pelling the  well-to-do  to  pay  taxes  out  of  proportion  to  what  may 
appear  to  be  the  benefits  derived.  Clearly,  the  millionaire 
ought  to  contribute  more  than  a  aboring  ma^  to  protect  the 
country  against  foreign  invasion.  Both  have,  or  ought  to 
have,  equal  personal  interests  in  preserving  the  sovereignty  of 
the  nation.  In  addition,  the  former  has  extensive  property 
rights  which  he  expects  the  government  to  protect.  Enforced 
contribution  according  to  ability,  if  carried  into  the  realm  of 
prices,  would,  however,  lead  to  ridiculous  results.  To  employ 
an  economic  term,  it  would  destroy  what  we  called  in  an  earlier 
chapter  the  consumers'  surplus. 

Acceptance  of  the  ability  principle  paves  the  way  for  two 
other  considerations.  Shall  a  tax  be  proportionate  or  progressive  ; 
that  is,  shall  persons  pay  in  exact  proportion  to  their  means,  or 
shall  the  rate  of  pay  increase  with  an  increase  in  wealth?  To 
make  our  problem  concrete  let  us  suppose  that  we  have  under 
consideration  the  assessment  of  taxes  against  three  individuals 
havingproperty  valued  respectively  at  $1,000,000,  $2000,  and 
$500.  A  one  per  cent  proportionate  rate  would  produce 
$10,000,  $20  and  $5  in  taxation,  thus  diminishing  the  wealth  of 


SHARE    OF   GOVERNMENT   IN   DISTRIBUTION     403 

these  three  to  $990,000,  $1980,  and  $495.  The  question  is: 
Has  each  individual  paid  according  to  his  abiUty?  Is  the 
sacrifice  the  same  in  the  three  cases  ?  One  may  mean  merely  the 
foregoing  of  a  costly  banquet ;  another,  the  loss  of  a  comfort ; 
while  the  third  may  mean  sacrifice.  To  place  the  three  on  a 
more  nearly  equal  basis  progressive  taxation  is  employed.  Here, 
we  may  suppose,  the  individual  with  the  lowest  income  pays 
one  per  cent,  the  next,  two  per  cent,  while  the  wealthiest  of 
the  three  pays  ten  per  cent.  Then  the  amounts  raised  from  the 
three  would  be  $5,  $40,  and  $100,000.  The  use  of  the  pro- 
gressive system  has  been  confined  very  generally  in  this  country 
to  income  and  inheritance  taxes,  largely  because  it  is  there, 
according  to  an  old  saying,  that  **the  goose  can  be  plucked 
with  the  least  squawk." 

Justice  and  expedience  in  taxation.  —  Every  one  that  has  had 
experience  in  levying  taxes  lays  emphasis  in  discussing  them  on 
the  justice  of  taxation.  It  would  be  nearer  the  truth,  however, 
to  say  that  expediency  is  more  often  the  basis  on  which  taxing 
laws  rest.  Lawmakers  know  full  well  that  no  tax,  whatever 
its  size  or  character,  is  popular.  For  that  reason  they  are  in- 
fluenced in  their  legislation  by  the  desire  to  create  as  little 
opposition  as  possible.  Hence  they  cling  to  old  taxes,  to  in- 
direct taxes,  and  to  taxes  on  the  rich.  Paying  an  old  tax, 
however  burdensome  and  unjust  it  may  be,  in  time  becomes  a 
habit  much  like  paying  the  monthly  grocery  bill  or  the  house 
rent.  In  other  words,  people  become  reconciled  to  its  harshness. 
Indirect  taxes  are  hidden  in  prices  of  goods,  and  hence  are 
usually  paid  unconsciously  by  consumers.  Few  of  us  ever 
bother  about  the  tax  on  tobacco,  chewing  gum,  perfume,  or 
playing  cards.  In  making  our  purchases  we  compare  '  only 
the  value  of  the  article  to  us  with  its  price.  Finally,  taxes 
imposed  on  the  rich  are  not  likely  to  prove  unpopular.  The 
rich  themselves  may  protest,  but  without  support  or  sympathy. 


404  ELEMENTARY   ECONOMICS 


93.   Kinds  of  Taxes 


Shifting  and  incidence  of  taxation.  —  An  important  phase  of 
taxation  relates  to  shifting  and  incidence.  We  have  just 
noticed  that  the  purchaser  of  a  cigar  gives  Httle  or  no  attention, 
if  indeed  he  be  aware  of  it,  to  the  fact  that  a  portion  of  the  pur- 
chase price  is  a  tax  which  the  manufacturer  has  paid  to  the 
national  government  and  then  shifted  to  the  retailer,  who  in 
turn  shifts  it  to  the  purchaser.  The  shifting  of  the  tax  on 
tobacco  is  not  unique.  Practically  every  tax  can  be  passed  on 
from  one  buyer  to  the  next  until  eventually  it  is  paid  by  the 
consumer.  Duties  on  imports  (tariff  duties)  are  often  shifted 
a  great  many  times,  the  number  depending  on  the  number  of 
transfers  of  ownership.  The  importer  of  English  broadcloth 
pays  a  certain  tax  to  the  government,  which  he  merely  adds  to 
the  price  of  his  goods.  This  same  tax  comprises  a  portion  of 
'the  price  which  the  garments  made  from  it  bear,  and  it  is 
finally  paid,  not  by  the  retail  clothier,  but  by  his  customers. 
House  taxes  too  emerge  in  the  form  of  higher  rents,  while  taxes 
on  business  of  all  sorts  are  largely  absorbed  in  higher  prices. 
It  is  generally  held,  however,  that  land  taxes  cannot  be  shifted; 
that  is,  the  owner  of  a  piece  of  land  must  bear  the  tax  assessed 
against  it.  Most  people  doubt  the  accuracy  of  this  statement. 
Yet  it  becomes  obvious  when  we  remember  that  the  return  from 
land  is  economic  rent,  which  depends  entirely  on  its  relative 
superiority  in  the  matters  of  production  and  location;  and 
that,  if  the  tenant  is  paying  full  economic  rent,  he  cannot  afford 
to  pay  more ;  also  that  the  tenant  cannot  shift  the  tax  by 
advancing  the  price  of  his  products,  for  this  price  is  fixed  by 
the  marginal  producer. 

The  general  property  tax.  —  The  best-known  tax  of  all  is 
the  general  property  tax.  As  the  term  suggests,  this  is  a  tax 
on  wealth  irrespective  of  its  nature  —  that  is,  a  tax  on  real 


SHARE   OF   GOVERNMENT   IN   DISTRIBUTION     405 

estate  and  personal  property.  This  tax  is  assessed  by  one  town- 
ship or  county  official  and  collected  by  another.  It  provides 
the  bulk  of  local  and  state  revenues ;  and  for  that  reason,  if  for 
no  other,  it  ought  to  be  sound  in  principle.  But  usually  it  is 
not.  First  of  all,  the  typical  general  property  tax  law  provides 
for  the  same  rate  of  taxation  on  personal  property  as  on  real 
estate ;  and  as  a  result  it  defeats  its  own  purpose,  for  only  the 
most  scrupulous  —  so  few  as  to  form  a  relatively  small  class  — 
will  disclose  their  entire  personal  wealth  to  a  tax  assessor.  This 
does  not  imply  that  the  American  people  are  liars  or  even  tax- 
dodgers.  It  does  mean,  however,  that  the  average  taxpayer, 
knowing  that  his  neighbors  do  not  disclose  their  personal  prop- 
erty, feels  justified  in  self-defense  to  refrain  from  disclosing  his 
own.  The  general  property  tax  glares  with  inequalities  even  if 
nothing  except  real  estate  were  taxed.  Usually  a  state  imposes, 
for  state  purposes,  one  flat  rate  over  all  its  counties.  Each 
county  has  its  own  body  of  assessors.  As  a  result,  widely  differ- 
ent valuations  are  often  placed  on  pieces  of  property  having 
about  the  same  value.  If,  to  take  an  extreme  example,  the 
state  tax  rate  is  50  cents  on  each  hundred  dollars'  valuation, 
and  one  assessor  estimates  the  average  value  of  farm  horses  at 
$30  and  another  assessor  at  $50,  one  group  of  horse  owners  is 
overtaxed  or  the  other  group  is  undertaxed.  Similar  inequalities 
may  easily  occur  in  counties  having  township  organizations. 
Some  attempts  are  made,  however,  to  equalize  taxes  both 
within  states  and  within  counties.  To  that  end  boards  of 
equahzation  and  boards  of  review  have  been  established.  If 
the  general  property  tax  is  so  unsatisfactory,  why  do  not  the 
voters  abolish  it  and  substitute  a  better  kind  of  taxation? 
The  answer  seems  to  be  that  an  old  tax  whose  exactions  are 
known  is  better  than  a  new  tax  which  may  carry  unknown 
burdens.  In  other  words,  the  typical  taxpayer  prefers  to  let 
well  enough  alone. 


406  ELEMENTARY   ECONOMICS 

The  income  tax.  —  The  practice  of  imposing  taxes  on  incomes 
has  been  general  in  Europe  for  years,  and  even  in  this  country 
several  of  the  states  have  had  income-tax  laws.  During  the 
Civil  War  the  national  government  collected  a  tax  on  incomes. 
Later,  in  1894,  Congress  again  provided  for  a  federal  income 
tax.  A  few  years  later  the  United  States  Supreme  Court 
declared  this  law  unconstitutional  on  the  ground  that  it  was  a 
direct  tax  not  apportioned,  as  the  Constitution  required,  among 
the  states  according  to  population.  The  people  then  took 
matters  in  their  own  hands.  The  result  was  the  Sixteenth 
Amendment,  which  gives  the  federal  lawmakers  authority  to 
tax  incomes.  The  first  income-tax  law  under  the  new  amend- 
ment exempted  all  incomes  below  $3000  ($4000  for  man  and 
wife),  and  provided  a  progressive  tax  on  all  incomes  above  that 
point.  The  total  amount  raised  the  first  year  (1915)  was 
approximately  one  hundred  million  dollars.  Our  entry  into  the 
Great  War  (1917)  caused  Congress  to  lower  the  exemption  to 
$1000  and  $2000  and  to  increase  rates  above  that  point. 

Until  recently  it  was  the  general  opinion  that  an  income  tax 
would  prove  to  be  unsatisfactory  in  this  country.  Our  few 
years'  experience,  however,  now  leads  us  to  the  contrary  view. 
This  tax  falls  only  on  the  well-to-do  and  the  rich  and  it  is  diffi- 
cult to  shift.  It  comes  out  of  incomes,  is  easily  collected,  and 
has  not  proved  excessively  unpopular  even  among  those  who 
feel  its  exactions.  It  seems  safe  to  predict,  therefore,  that  the 
income  tax  will  become  increasingly  important,  both  as  a 
source  of  revenue  and  as  a  means  for  lessening  the  inequalities 
in  distribution. 

Inheritance  taxes.  —  An  inheritance  tax  is  collected  on 
estates  as  they  pass  into  the  possession  of  heirs.  Practically 
all  states  have  such  a  tax,  though  less  than  a  generation  ago 
the  right  of  the  state  to  share  in  the  estates  of  its  citizens  was 
very  generally  regarded  with  disfavor.     Like  the  income  tax, 


SHARE    OF   GOVERNMENT   IN   DISTRIBUTION     407 

the  inheritance  tax  is  usually  confined  to  the  estates  of  the  well- 
to-do  and  the  rich,  and  almost  always  bears  a  progressive  rate. 
Unlike  an  income  tax,  however,  an  inheritance  tax  is  paid  from 
capital  and  not  from  income.  The  principle  involved  in  taxing 
estates  is  of  great  social  importance.  Often  a  deceased  has  no 
near  heirs,  none,  let  us  say,  nearer  than  a  second  or  third  cousin. 
Why,  in  the  absence  of  a  will,  should  these  distant  relatives 
have  a  greater  interest  in  the  estate  than  the  neighborhood 
where  the  deceased  had  spent  his  whole  life,  or  the  business 
men  with  whom  he  had  been  associated  for  years?  On  what 
common-sense  ground  can  a  distantly  related  person,  one 
perhaps  whom  the  deceased  had  never  known,  claim  to  inherit 
property?  Both  questions  were  revolutionary  a  generation 
ago.  They  are  less  so  now.  Another  generation  may  see  them 
answered  in  the  interest  of  the  state. 

Other  kinds  of  taxes.  —  The  forms  of  taxation  just  noticed 
do  not  by  any  means  exhaust  the  list,  though  in  many  respects 
they  are  the  most  important.  Others  that  might  have  been 
discussed  are  tariff  duties,  excise  taxes,  taxes  on  transactions, 
corporation  taxes,  business  taxes,  license  taxes,  and  poll  taxes. 
Each  has  its  own  problems  of  administration;  each  serves  a 
particular  purpose  ;  but  all  at  bottom  involve  the  same  general 
principles  which  we  have  already  noted. 

EXERCISES  AND   PROBLEMS 


1.  Why  are  there  often  so  many  taxing  bodies  in  a  community? 

2.  What  only  restricts  the  power  of  Congress  to  lay  taxes  ? 

3.  Is  this  restriction  important?     Why,  or  why  not? 

4.  In  what  ways  are  taxing  powers  of  local  units  limited  ? 

5.  Why  should  the  right  of  a  school  district  to  tax  itself  be  regulated 
by  state  law  ? 

6.  Are  these  regulations  desirable  ?     Explain. 


408  ELEMENTARY   ECONOMICS 

7.  Account  for  the  increase  in  the  revenues  of  the  national  govern- 
ment during  the  past  half  century. 

8.  What  is  the  chief  money-spending  function  of  the  national 
government  ? 

.   9.   What  are  the  principal  revenue  sources  of  the  school  district? 
the  county?  the  city? 

10.  What  is  the  justification  for  government  expenditures  where 
private  funds  would  otherwise  be  used? 

11.  What  risks  are  involved  in  government  expenditures? 

12.  Why,  or  why  not,  should  taxes  be  levied  according  to  benefit? 

13.  What  is  the  relation  between  the  need  of  public  assistance  and 
the  ability  to  pay  taxes? 

14.  Why  should  a  school  tax  levied  according  to  the  benefit  principle 
be  impracticable? 

15.  How  does  the  ability  principle  of  taxation  tend  to  equalize 
incomes  ? 

16.  What  is  the  essential  difiference  between  a  proportionate  tax 
and  a  progressive  tax  ? 

17.  What  are  the  merits  of  each? 

18.  Just  what  is  meant  by  "expediency"  in  taxation? 

19.  Why  is  an  old  tax  usually  preferred  to  a  new  tax? 

20.  When  is  a  tax  said  to  be  "shifted"? 

21.  Why  are  taxes  usually  easy  to  shift?     Explain. 

22.  Which  taxes  are  the  easiest  to  shift?     Why? 

23.  What  is  a  "general  property  tax"? 

24.  What  are  its  chief  defects  ? 

25.  Why  do  many  people,  otherwise  honest,  falsify  their  personal 
property  tax-schedules? 

26.  Why  should  income  taxes  and  inheritance  taxes  be  confined  to 
the  well-to-do  classes  ? 

27.  What  is  the  essential  difference  between  an  income  tax  and  an 
inheritance  tax? 

28.  Just  why  was  a  constitutional  amendment  necessary  to  legalize 
a  federal  income  tax? 

B 

1.  Get  from  the  local  tax-collector  or  from  the  proper  county  official, 
information  concerning  rates  of  taxation,  purposes  for  which  various 
taxes  are  imposed,  the  cost  of  collection,  and  the  attitude  which 
people  take  toward  each  kind  of  tax. 


SHARE   OF   GOVERNMENT   IN   DISTRIBUTION     409 

2.  Interview  some  friendly  taxpayer. 

a.  How  does  he  regard  the  school  tax? 

b.  Has  he  suggestions  to  offer  concerning  changes  in  taxation? 

c.  Does  he  consider  the  valuation  placed  on  his  own  property 

for  taxing  purposes  equitable  compared  to  the  valuation 
placed  on  his  neighbors'  properties  ? 

d.  Get  his  opinion  on  the  weakness  and  strength  of  the  general 

property  tax. 

3.  Make  a  list  of  enterprises  supported  out  of  public  funds,  which 
enterprises  provide  services  free  to  all,  regardless  of  their  tax-paying 
abilities. 

4.  Secure,  if  possible,  published  lists  of  personal  property  assessments. 
a.  Do  there  appear  to  be  any  discrepancies  between  the  valuation 

placed  on  the  personal  property  of  any  individual  and  the 

amount  of  personal  property  he  is  reputed  to  possess? 
6.  How  does  the  total  valuation  of  personal  property  compare 

with  the  total  valuation  of  real  estate  for  the  same  area  ? 
c.   Is  there  in__your  community  a  limit  below  which  personal 

property  is  not  assessed?     If  so,  why? 

5.  Inquire  of  some  tax-assessing  official  about  the  difficulties  of 
determining  property  values,  the  inclination  of  people  to  undervalue 
their  own  property,  the  general  dissatisfaction  with  valuations,  and  the 
criticism  made  of  them. 

6.  Suppose  you  were  a  member  of  a  lawmaking  body  which  had 
before  it  a  bill  for  taxing  boarding-house  keepers  ten  dollars  a  year 
each,  on  the  ground  that  the  money  thus  raised  in  each  city  would  pay 
the  salary  of  a  boarding-house  inspector  for  that  city. 

a.  What  is  your  first  reaction  on  the  question? 

h.  Do  boarding-houses  need  to  be  inspected?     Why? 

c.  If  so,  who  should  pay  the  expense  of  inspection?     Why? 

d.  How  would  the  fact  that  you  represented  a  college  town  or  a 

mining  district  affect  your  vote? 

e.  How  would  you  expect  members  from  rural  districts  to  vote  ? 


1.  The  property  of  the  residents  of  a  certain  section  of  one  of  the 
largest  cities  in  the  United  States  is  taxed  by  twenty-seven  taxing 
boards. 

a.  Why  have  so  many  taxing  boards  been  developed  ? 


410  •     ELEMENTARY   ECONOMICS 

h.  Is  it  probable  that  one  taxing  body  could  accomplish  the  same 

purpose  ?     Explain, 
c.  Would  you  expect  the  aggregate  rate  to  be  higher  in  one  case 

than  in  the  other  ?     Why,  or  why  not  ? 

2.  In  the  matter  of  ofi&cial  patronage,  measured  either  in  numbers 
or  in  salaries,  the  Mayor  of  New  York  City  ranks  alongside  the  Presi- 
dent of  the  United  States. 

a.  Account  for  this  fact. 

h.  Compare  the  receipts  and  expenditures  of  the  two  organi- 
zations, 
c.   Contrast  the  governmental  functions  of  the  two  organizations. 

3.  The  argument  is  often  advanced  that  each  should  be  taxed 
according  to  the  benefit  he  gets  from  the  expenditure  of  public  money. 

a.  What  effect  do  good  schools  have  on  the  number  and  character 
of  the  people  in  the  community? 

h.  How  does  an  increase  in  population  together  with  a  rise  in  its 
standards  affect  property  values?  legitimate  business? 

c.  What  return,  then,  does  a  childless  property-owner  or  a  child- 
less business  man  get  from  his  school  taxes  ? 

4.  The  administration  of  a  tax  levied  according  to  the  benefit  prin- 
ciple would  be  extremely  difficult. 

a.  When  should  each  property  holder  pay  his  taxes  for  the  support 

of  a  city  fire  department  ? 
h.   What  should  each  pay  toward  maintaining  a  public  park?  a 

health  bureau  ? 
c.    Why  should  not  nonresident  owners  of  vacant  lots  be  entirely 

exempt  from  such  taxes  ? 

5.  The  statement  that  a  land  tax  cannot  be  shifted  needs  to  be 
examined  with  care.  Would  the  shifting  be  possible  if  the  tax  collected 
were  spent  on  building  improved  wagon  roads?  Can  you  think  of 
other  expenditures  that  might  add  to  the  productiveness  of  the  land 
taxed,  and  hence  increase  its  economic  rent  ? 

SUPPLEMENTARY   READING 

Bullock,  Introduction  to  the  Study  of  Economics,  3d  ed.,  pa^ges  529-587. 

Ely,  Outlines  of  Economics,  3d  ed.,  pages  643-739. 

Seager,  Principles  of  Economics,  pages  472-535. 

Seligman,  Principles  of  Economics,  5th  ed.,  pages  267-270,  303. 

Taussig,  Principles  of  Economics,  3d  ed.,  Vol.  II,  pages  483-560. 


CLASSIFIED   COURSE  OF  READING 

In  the  brief  lists  that  follow,  the  standard  college  texts  referred  to  at 
the  close  of  each  chapter  are  listed  as  a  matter  of  convenience,  together 
with  additional  titles,  under  General  Economics.  In  choosing  the 
rest  of  the  titles,  the  author  has  attempted  to  confine  himself  to  what 
are  coming  to  be  known  as  "  economic  problems."  Those  best  adapted 
to  beginners  are  marked  with  an  asterisk  [*].  The  rest  may  profitably 
be  studied  by  teachers  and  busijiess  men ;  also  by  advanced  pupils. 

I.   General  Economics 

*Bullock,  C.  J. :   An  Introduction  to  the  Study  of  Economics. 
*Carver,  T.  N. :   Principles  of  Political  Economy. 

Clark,  J.  B. :    The  Distribution  of  Wealth. 

Commons,  J.  R. :    The  Distribution  of  Wealth. 
*Ely,  R.  T. :   Outlines  of  Economics. 
*Fetter,  F.  A  :   Economics. 
*Fisher,  Irving  :  Elementary  Principles  of  Economics. 

Gide,  Charles  :   Principles  of  Political  Economy. 

Gide,  Charles  :   Political  Economy. 
*Johnson,  A.  S. :   Introduction  to  Economics. 

Marshall,  Alfred  :   Principles  of  Economics. 

Mill,  J.  S. :    The  Principles  of  Political  Economy. 

Patten,  S.  N. :    The  Premises  of  Political  Economy. 
*Seager,'H.  R. :   Principles  of  Economics. 
*Seligman,  E.  R,  A. :   Principles  of  Economics. 

Smith,  A4am  :    Wealth  of  Nations. 
♦Taussig,  F.  W. :   Principles  of  Economics. 
*Walker,  F.  A. :  Elementary  Course  in  Political  Economy. 

Walker,  F.  A. :   Political  Economy. 

II.   Money,  Banking,  and  Public  Finance 

BuUock,  C.  J. :    The  Monetary  History  of  the  United  States. 
Cannon,  J.  G. :   Clearing  Houses. 

411 


412  CLASSIFIED  COURSE   OF  READING 

*Clare,  George :    The  A  B  C  of  the  Foreign  Exchanges. 

Conant,  C.  A. :    The  Principles  of  Money  and  Banking. 

Conant,  C.  A. :   History  of  Modern  Banks  of  Issue. 

Dewey,  D.  R. :   Financial  History  of  the  United  States. 

Fisher,  Irving :    The  Purchasing  Power  of  Money. 

Fisher,  Irving :    Why  the  Dollar  Is  Shrinking. 

Fiske,  A.  K. :    The  Modern  Bank. 

Hepburn,  A.  B. :   Contest  for  Sound  Money. 
*Holdsworth,  J.  T. :   Money  and  Banking. 
♦Johnson,  J.  F. :   Money  and  Currency. 

Jones,  E.  D. :   Economic  Crises. 

Kemmerer,  E,  W. :   Postal  Savings. 

Kemmerer,  E.  W. :    The  A  B  C  of  the  Federal  Reserve  System. 

Kinley,  David :    Money  —  A  Study  of  the  Theory  of  the  Medium  of 
Exchange. 

Laughlin,  J.  L. :   History  of  Bimetallism  in  the  United  States. 

MacGregor,  T.  D. :    The  Book  of  Thrift. 

Noyes,  A.  D. :   Financial  Chapters  of  the  War. 
*Scott,  W.  A. :   Money  and  Banking. 
*White,  Horace  :    Money  and  Banking. 
*Wims,  H.  P. :    The  Federal  Reserve. 

Willis,  H.  P. :   History  of  the  Latir.  Monetary  Union. 

III.    Labor 

*Abbott,  Edith  :    Women  in  Industry. 

*Adams,  T.  S.,  and  Sumner,  Helen:   Labor  Problems. 

Butler,  E.  B. :    Women  and  the  Trades. 
*Carlton,  F.  T. :    The  History  and  Problems  of  Organized  Labor. 

Commons,  J.  R. :   Labor  and  Administration. 

Ely,  R.  T. :    The  Labor  Movement  in  America. 

Gilbert,  Eleanor:    The  Ambitious  Woman  in  Business. 

Oilman,  C.  P. :    Women  and  Economics. 

Goldmark,  Josephine  :   Fatigue  and  Efficiency. 

Groat,  G.  G. :    An  Introduction  to  the  Study  of  Organized  Labor   in 
America. 

Hollander,  J.  H.,  and  Barnett,.  G.  E. :    Studies  in  American  Trade 
Unionism. 

Laidler,  H.  W. :   Boycotts  and  the  Labor  Struggle. 

Mangold,  G^  B. :   Problems  of  Child  Welfare. 


CLASSIFIED  COURSE   OF  READING  413 

*McLean,  Anna  M. :    Wage- Earning  Women. 
*Mitchell,  John :   Organized  Labor. 
*ShadweU,  Arthur  :   Industrial  Efficiency. 

Spargo,  John :    The  Bitter  Cry  of  the  Children. 

Webb,  Sidney  and  Beatrice :  Industrial  Democracy. 

TV.   Immigration 

Commons,  J.  R. :   Races  and  Immigrants  in  America. 
*Fairehild,  H.  P. :   Immigration. 

Hall,  P.  F. :   Immigration  and  its  Effects  on  the  United  States. 
*Hoiirwich,  I.  A. :    Immigration  and  Labor. 

Jenks,  J.  W.,  and  Lauck,  W.  J. :    The  Immigration  Problem. 

Roberts,  Peter :    The  New  Immigration. 
*Warne,  Frank :    The  Immigrant  Invasion. 

V.    Socialism  and  Social  Insurance 

Angell,  Norman  :   The  British  Revolution  and  the  American  Democracy. 

Brooks,  J.  G. :    The  Social  Unrest. 

Brooks,  J.  G. :   American  Syndicalism. 

Cross,  I.  B. :    The  Essentials  of  Socialism. 
*Ely,  R.  T. :  Socialism  and  Social  Reform. 

Engels,  Frederick :  Socialism,  Utopian  and  Scientific. 

Ghent,  W.  J. :   Mass  and  Class. 
*Henderson,  C.  R. :   Industrial  Insurance  in  the  United  States. 

Hillquit,  Morris :  Socialism  in  Theory  and  Practice. 
*Hillquit,  Morris  :   History  of  Socialism  in  the  United  States. 

Hillquit,  Morris,  and  Ryan,  J.  A. :  Socialism,  Promise  or  Menace  f 

Hughan,  J.  W. :   American  Socialism  of  the  Present  Day. 

Hunter,  Robert :  Socialists  at  Work. 

Hunter,  Robert :    Violence  and  the  Labor  Movement. 

Kautsky,  Karl :    The  Social  Revolution.  , 

Macdonald,  J.  R. :    The  Socialistic  Movement. 

Mallock,  W.  H. :   A  Critical  Examination  of  Socialism. 

Marx,  Karl :   Capital. 

Myers,  W.  S. :   Socialism  and  American  Ideals. 

Nearing,  Scott :   Iricome. 

O'Neal,  James  :   Militant  Socialism. 

Ryan,  J,  A. :   A  Living  Wage. 


414  CLASSIFIED   COURSE   OF  READING 

Sellars,  R.  W. :    The  Next  Step  in  Democracy. 

Skelton,  O.  D. :   Socialism,  a  Critical  Analysis. 
*Spargo,  John :   Socialism, 

Spargo,  John  :    Capitalist  and  Labor. 

Spargo,  John  :    The  Substance  of  Socialism. 

Spargo,  John :   Syndicalism,  Industrial  Unionism  and  Socialism. 

Spargo,  John :   The  Socialist:,  Who  They  Are  and  What  They  Stand  For. 
*Vaughan,    (Father)   Bernard :    Socialism  from  the   Christian  Stand- 
point. 

Veblen,  Thorstein  :    The  Theory  of  the  Leisure  Class. 

Walling,  W.  E. :   Socialism  as  It  Is. 
♦Wells,  H.  G. :   New  Worlds  for  Old. 

VI.    Tariff 

Ashley,  Percy :   Modern  Tariff  History. 

Ashley,  W.  J. :    The  Tariff  Problem. 

Eaton,  A.  M. :   Free  Trade  and  Protection. 

Morgan,  J.  E. :   Selected  Articles  on  Free  Trade  and  Protection. 

Patten,  S.  N. :    The  Economic  Basis  of  Protection. 

Pierce,  FrankUn  :    The  Tariff  and  the  Trusts. 
*Stanwood,  Edward :    American  Tariff  Controversies  in  the  Nineteenth 

Century. 
.  Sumner,  W.  G. :    Protectionism. 
♦Tarbell,  Ida  M. :    The  Tariff  in  Our  Times. 
♦Taussig,  F.  W. :    Tariff  History  of  the  United  States. 

Taussig,  F.  W. :   State  Papers  and  Speeches  on  the  Tariff. 

Taussig,  F.  W. :   Some  Aspects  of  the  Tariff  Question. 

VII.    Trusts 

♦Jenks,  J.  W. :    The  Trust  Problem. 

Lloyd,  H.  D. :    Wealth  against  Commonwealth. 

Montague,  G.  H. :   The  Rise  and  Progress  of  the  Standard  Oil  Company 
♦Moody,  John :    The  Truth  about  the  Trusts. 
♦Tarbell,  Ida,  M. :    The  History  of  the  Standard  Oil  Company. 


INDEX 


Advertising,  influence  of,  40,  41, 

Agricultural  rent,  discussion  of,  330- 
334. 

Agriculture,  developments  in,  87,  88; 
tendencies  in,  109 ;  varying  costs 
in,  116;  extent  of,  118;  application 
of  the  law  of  diminishing  returns  to; 
122-126. 

American  Federation  of  Labor,  in- 
fluence of,  312,  313. 

American  industrial  revolution,  'na- 
ture of,  86. 

Arbitration,  labor  disputes  settled  by, 
319-321. 

Balance  of  trade,  nature  of,  247,  248. 

Baltimore  and  Ohio  Railroad,  opening 
of,  156. 

Bank  check,  form  of,  228. 

Bank  note,  nature  of,  228. 

Bank  statement,  explanation  of,  231- 
233. 

Banking,  history  of,  227-237. 

Barter,  disadvantages  of,  22. 

Bill  of  exchange,  nature  of,  245-249. 

Bimetallism,  description  of,  213,  214, 
217,  218. 

Bland-Allison  Act,  provisions  of,  220. 

Bonds,  nature  of,  93. 

Borrower,  viewpoint  of,  3-^,  347. 

Building  and  loan  association,  im- 
portance of,  74;  statement  of, 
76-78. 

Business  man,  characteristics  of,  357, 
358. 

Buyers'  schedule,  nature  of,  59. 

Buyers'  surplus,  nature  of,  57. 

By-products,  utilization  of,  110. 

California,  production  of  gold  in,  120, 

218. 
Canals,  construction  of,  156. 


Capital,  growth  of,  85;  definition  and 
origin  of,  99;  discussion  of,  130- 
139. 

Capital  (Das  Kapital),  socialistic  doc- 
trines in,  371,  372. 

Capitalistic  production,  nature  of, 
132-134. 

Chain  stores,  business  of,  178,  179. 

Checks  (bank),  use  of,  244. 

Child  labor,  opposition  to,  322. 

Child  labor  laws,  enactment  of,  377. 

Christian  socialists,  leaders  of,  371. 

Circulating  capital,  definition  of,  134, 
135. 

City  sites.     See  Urban  land. 

Class  antagonism,  causes  of,  287,  289. 

Clayton  Anti-Trust  Act,  provisions  of, 
190.     See  Trusts. 

Closed  shop,  definition  of,  315. 

Closed  union,  definition  of,  315. 

Coinage,  operation  of,  213,  214,  217, 
218. 

Comforts,  definition  of,  30. 

Commerce,  discussion  of,  241-252. 

Commercial  bank,  functions  of,  229. 

Commercial  education,  scope  of,  9. 

Communist  Manifesto,  extract  from, 
372. 

Competition,  nature  of,  141-145;  in- 
fluence on  monopoly  price  of,  147, 
148;  among  railroads,  158-161; 
profits  under,  363. 

Complex  division  of  labor,  definition 
of,   102. 

Conciliation,  labor  disputes  settled  by, 
319. 

Constitution  of  the  United  States, 
guarantees  of,  323.  • 

Consumers'  goods,  definition  of,  100. 

Consumers'  surplus,  definition  of,  50, 
51. 

Consumption,  nature  of,   19,  20,  29^ 


415 


416 


INDEX 


37 ;  laws  of,  40-51 ;  aspects  of,  67- 
79 ;   habits  of,  78. 

Cooperation,  effect  on  profits  of,  363- 
366 ;   by  the  government,  378. 

Copyrights,  basis  of,  183 ;  laws  re- 
garding, 185. 

Corporation,  a  form  of  business  or- 
ganization, 90-94. 

Corporation  tax,  place  of,  407. 

Costs  of  production,  variations  in, 
115;    risk  an  element  in,  384-386. 

Credit,  effect  of  business  expansion  on, 
275,  276. 

Credit  monejii^forms  of,  209. 

Crime,  causes  of,  31. 

Crises,  causes  of,  274-277. 

Currency.     See  Money. 

Cutthroat  competition,  nature  of,  160. 

Deductive  reasoning,  use  of,  16;    ^ 

Demand,  nature  of,  32-34,  54,  55; 
definition  of,  33  ;  elasticity  of,  34-37 ; 
supply  and,  147.     See  Price,  Supply. 

Department  stores,  function  of,  176, 
177. 

Diminishing  returns,  law  of,  122-128. 

Diminishing  utility,  law  of,  44,  45. 

Direct  marketing,  nature  of,  176-179. 

Discriminations  in  railroad  rates,  159, 
160. 

Distribution,  inequalities  in,  12 ;  na- 
ture of,  23,  24 ;    definition  of,  283. 

Distribution  of  wealth,  account  of, 
283-292. 

Division  of  labor,  extent  of,  100-108; 
social  advantages  of,  105;  disad- 
vantages of,  105,  106. 

Dollar,  weight  of  gold,  204,  205. 

Economic  activity,  motives  behind,  29- 

32. 
Economic  good,  definition  of,  10. 
Economic  law,  nature  of,  17. 
Economical    consumption,    nature    of, 

69-72. 
Economics,    dei&nition   of,    4;     nature 

of,  16-19 ;    art  side  of,  17 ;    material 

for  the  study  of,   18,   19;    divisions 

of,  19-24. 


Education,  industry  and,  8;  tend- 
encies in,  9 ;  influence  of,  299-301, 
358. 

Efficiency,  elements  in,  9,  102-104; 
consumption  and,  68,  69 ;  relation 
of  wages  to,  303-306. 

Eight-hour  day,  advantages  of,  315. 

Elastic  currency,  definition  of,  215, 
216. 

Elkins  Amendment,  provisions  of,  165. 

Embargo  Act,  importance  of,  86. 

Employees.  See  Labor,  Organized  la- 
bor. Wages. 

Employers,  organization  of,  318,  319. 

English  industrial  revolution,  nature 
of,  85,  86. 

Enterpriser,  functions  of,  100. 

EjMJpnge,  nature  of,  22. 

El^Eiditur^,  nature  of  governmental, 
W-40L 

Extensive  cultivation,  nature  of,  124- 
126. 

Falling  prices,  effects  of,  276,  277. 
Family  budgets,  study  of,  287. 
Federal  Reserve  Ba3k  Law,  provisions 

of,  236,  237. 
Federal  Reserve  notes,  nature  of,  222, 

223.         ^ 
federal  Trade  Commission,   establish- 
ment of,  190. 
Fertility,  a  factor  in  rent,  334. 
First  United  States  Bank,  account  of, 

216,  217,  233,  234. 
Fisheries,    extent   and   importance   of, 

120-122. 
Fixed  capital,  definition  of,  134,  135. 
Forests,  extent  and  character  of,  118. 
Form  utility,  definition  of,  20. 
Free  good,  definition  of,  10. 
Free  land,  effect  on  distribution  of,  283, 

284. 
Free  silver,  agitation  for,  221,  222. 
Free   trade,    basis   of,    262,    263.     See 

Protective  tariff. 
Futures,  the  buying  of,  360,  361. 

General  property  tax,  nature  of,  404, 
405. 


INDEX 


417 


duatry 


Germany,  social  insurance  in,  386-388. 
Gold,   not   a   free   capital   good,    137 ; 

price  of,  205;   characteristics  of,  201, 

202 ;     market   and   mint   values   of, 

213,  214;   world  production  of,  217; 

production    in    California    of,    120, 

218. 
Gold  certificate,  nature  of,  208.     See 

Representative  money. 
Gold  points,  definition  of,  24S. 
Gold  reserves,  functions  of,  209. 
Gold  standard,  adoption  of,  222. 
Gold  supply,  automatic  checks  on,  252. 
Good,  definition  of,  9.     See  Free  good. 

Economic  good. 
Government    expenditures,    effect    of 

price  fluctuations  on,  271,  272 
Government    operation    of     indjjgy^y 

problems  of,  378,  379. 
Government       paper       money 

United  States  notes. 
Government   regulation,   influence   on 

price  of,  149,  150;    railroads  under, 

162-165;    a  substitute  for  Socialism, 

377-379. 
Great  Britain,  sdfial  insurance  in,  388, 

389. 
Greenbacks.     See  United  States  notes. 
Gresham's  law,  explanatjpit  of,  215. 

Hamilton,  Alexander,  reports  on  bank- 
ing, 234 ;   on  the  tariff,  263. 

Heredity,  influence  of,  358. 

Home -owning,  in  the  United  States, 
290. 

Honesty,  an  e'ement  in  efficiency, 
103. 

Horn's  of  labor,  lessening  of,  105. 

Human  motives,  examination  of,  374, 
375. 

Imagination,  a  factor  in  success,  357. 

Immigration,  different  aspects  of,  5; 
problems  of,  323-326. 

Incidence  of  taxation,  definition  of, 
404. 

Income,  education  and,  8;  distribu- 
tion of,  285-287 ;  influence  of  edu- 
cation on,  299-301. 


Income  tax,  federal  and  state  laws  on, 

406. 
Index  numbers,  principle  of,  273,  274. 
Indians,  medium  of  exchange  among, 

199. 
Indirect  marketing,  basis  of,  173,  174 ; 

wastes  in,  175,  176. 
Indirect  production,  advantages  of ,  132. 
Individual  capital,  nature  of,  137,  138. 
Individual,  society  and  the,  6. 
Inductive  reasoning,  use  of,  16. 
Industrial  efficiency.     See  Efficiency. 
Industrial  Workers  of  the  World,  pro- 
gram of,  313.  ^ 
Industry,  individual  viewpoint  of,  6; 
social   viewpoint    of,    7 ;     education 
and,    8 ;      organization    of,    85-94 ; 
diversification    of,     108 ;      place    of 
capital  in,  133 ;    effect  of  price  level 
oji,  274-277. 
Inefficiency,  causes  of,  289-291. 
Inheritance  tax,  characteristics  of,  406, 

407. 
Initiative,  a  factor  in  success,  357. 
Insurance.     See  Social  insurance. 
Intensive  cultivation,  nature  of,  124- 

126. 
Interest,  discussion  of,  345-353. 
Interest  rate,  method  of  fixing,   349, 

350 ;   variation  in,  351-353. 
Inter-regional    trade,    in    the    United 

States,  241-243. 
Interstate    Commerce  Act,   provisions 

of,  163-165. 
Investing,  nature  of,  131. 
Investment  bank,  nature  of,  230. 
Investments,    growth    of,    75;     made 

liquid,  94. 
Iron  ore,  production  of,  120. 

Joint  costs,  principle  of,  161. 

Knights  of  Labor,  sketch  of,  311,  312. 

Labor,  a  factor  of  production,  97.  See 
American  Federation  of  Labor,  Or- 
ganized labor,  Wages. 

Labor  legislation,  need  for,  321-324; 
character  of,  323. 


418 


INDEX 


Labor  problems,  nature  and  account 
of,  311-324. 

Laissez  faire,  the  doctrine  of,  141-143. 
See  Mercantilism. 

Land,  importance  in  human  welfare 
of,  11,  12;  a  factor  of  production, 
97,  114-128. 

Land  values,  relation  of  economic  rent 
to,  339. 

Large-scale  production,  advantages  of, 
108-110. 

Law,  definition  of,  4. 

Law  of  monopoly  price,  explanation 
of,   145-147. 

Laws  of  economics,  application  of,  17, 
18.  See  Economic  law.  Consump- 
tion, Diminishing  returns,  Diminish- 
ing utility,  Marginal  utility. 

Lender,  viewpoint  of,  348-349. 

Location,  a  factor  in  production,  117, 
334. 

Lumber,  production  of,  118. 

Luxuries,  nature  of,  30,  31. 

Mail-order  houses,  functions  of,    177, 

178. 
Malproduction,  definition  of,  275,  276. 
Mann-Elkins  Amendment,   provisions 

of,  165. 
Manufactures,  domestic  system  in,  85; 

developments   in,   87 ;     location   of, 

108. 
Marginal  utility,  law  of,  46-51. 
Market,  production  for,  169,  170. 
Market  price,  determination  of,  56-63. 

See  Price. 
Market  ratio.     See  Gold,  Silver. 
Marketing,  nature  and  extent  of,  169- 

179. 
Marx,  Karl,  a  socialistic  leader,  371. 
Maximum  prices,  nature  of,  56. 
Medium  of  exchange.     See  Money. 
Mercantilism,    doctrine    of,     141-143. 

See  Laissez  faire. 
Merchandising.     See  Retailing. 
Middleman,   functions   of,    21 ;     place 

of,  173. 
Military   self-sufficiency,   maintenance 

of,  265. 


Minimum  prices,  nature  of,  56. 
Minimum  wage,  proposals  for,  392. 
Mining,  varying  costs  of  production  in, 

117. 
Mint  ratio.     See  Gold,  Silver. 
Monetary  laws,  account  of,  213-224. 
Money,  introduction  of,  171 ;    uses  of, 

199-209 ;  kinds  of,  223  ;  fluctuations 

in  the  value  of,  269-271. 
Monopolistic  profits,   concealment  of, 

150,  151. 
Monopoly,   limitations   on,   147,    148; 

contrasted   with   competition,    141- 

151. 
Monopoly  price,  law  of,  145-147. 

National  bank  law,  operation  of,  235, 
236. 

National  bank  notes,  issue  of,  219. 

Natural  resources.     See  Land. 

Necessaries,  definition  of,  30. 

New  England,  industry  in,  108 ;  agri- 
culture in,  117. 

New  Zealand,  arbitration  laws  of,  321. 

Noncompeting  groups,  existence  of, 
295-303. 

No-rent  land,  definition  of,  332-334. 

Obedience,    an   element   in   efficiency, 

103. 
Observation,  importance  of,  18. 
Occupation,  the  choice  of,  302,  303. 
Open  shop,  definition  of,  315. 
Open  union,  definition  of,  315. 
Organized  labor,  spirit  of,  7 ;   aims  and 

methods  of,  313-319. 
Overproduction,  definition  of,  275,  276. 

Par  of  exchange,  definition  of,  248. 

Partnership,  advantages  of,  89,  90. 

Patent  Law  of  the  United  States,  provi- 
sions of,  183-185;   objections  to,  186. 

Patents,  basis  of,  183  ;   number  of,  184. 

Piece  wages,  definition  of,  306,  307. 

Place  utility,  definition  of,  21. 

Plain  living,  gospel  of,  70,  71. 

Point  of  diminishing  returns,  definition 
of,  123. 

Political  science,  definition  of,  3. 


INDEX 


419 


Population,    growth    of    (180Q-1910), 

98;   in  cities  (1790-1912),  101,  104. 
"Pork  barrel"   legislation,   nature  of, 

378. 
Possession  utility,  definition  of,  21. 
Price,  demand    and,    33,   34;   relation 

of  demand   and   supply   to,    54-63 ; 

influence  of  monopoly  on,  145-147 ; 

effect  of  the  flow  of  gold   on,  252; 

relation  of  economic  rent  to,  338,  339. 
Price-fixing,  difficulties  of,  192,  193. 
Price  fluctuations,  influence  on  demand 

of,   34-37;     guarding   against,    269- 

277,  359-361. 
Private 'property,  institution  of,  375- 

377. 
Production,  nature  of,  20-22;    factors 

of,  97-100;    varying  costs  in,   115- 

117,  359-363. 
Profits,  discussion  of,  356-366. 
Profit-sharing,    nature    and    definition 

of,  307,  308. 
Promissory  note,  form  of,  232. 
Protective  tariff,  discussion  of,  256-265. 
Public  utilities,  regulation  of,  190-192. 

Quantity  theory  of  money,  explana- 
tion of,  216. 

Railroads,  developments  in,  87;  con- 
solidation of,  109 ;  building  of,  156- 
158;  mileage  of,  157;  competition 
among,  158-161 ;  taken  over  by  the 
government,  374.     See  Rates. 

Rates,  making  of  railroad,  161,  162. 

Rates  of  exchanges,  fluctuations  in, 
248,  249. 

Rent,  discussion  of,  330-341. 

Replacement  fund,  nature  of,  135,  136, 
384-386. 

Representative  money,  forms  of,  206- 
208. 

Resumption  of  specie  payments,  ac- 
count of,  208,  209,  219,  220. 

Retailer,  place  of,  172,  173. 

Retailing,  function  of,  21 ;  successful 
cooperation  in,  365-366. 

Revenues,  sources  of  governmental, 
397^01. 


Risk,  relation  of  interest  rate  to,  351 ; 
in  industry,  382-386. 

Sabotage,  definition  of,  313. 

Saving,  avenues  of,  74-78 ;    nature  of, 

131. 
Savings    bai^ks,    importance    of,    74; 

functions  of,  229,  230. 
"Scab"  labor,  definition  of,  316. 
School     attendance,     in    the     United 

States,  301. 
Second  United  States  Bank,  account 

of,  216,  217,  233,  234. 
Sellers'  schedule,  nature  of,  60. 
Sellers'  surplus,  nature  of,  57. 
Sherman  Anti-Trust  Act*  provisions  of, 

189. 
Sherman  Silver  Purchase  Act,    provi- 
sions of,  221. 
Shifting  of  taxation,  definition  of,  404. 
Short  hauls,  nature  of,  162. 
Silver,  market  and  mint  ratios  of,  213, 

214;      world    production    of,    214; 

demonetization  of,  220-222. 
Silver  certificate,  nature  of,  208.     See 

Representative  money. 
Silver  dollar,  weight  of,  206. 
Simple  division  of  labor,  definition  of, 

101. 
Single  enterpriser,  place  of,  88. 
Single  tax,  discussion  of,  335-338. 
Smith,  Adam.     See  Wealth  of  Nations. 
Social  capital,  nature  of,  137,  138. 
Social  insurance,  discussion  of,  382-393. 
Socialism,  discussion  of,  369-379. 
Social    problems,    caused   by   unequal 

distribution,     287-291;      effect     of 

immigration  on,  326. 
Social  sciences,  nature  and  content  of, 

3 ;   inter-relation  of,  5. 
Social  unrest,  causes  of,  71,  72. 
Society,  industrial  viewpoint  of,  3-12; 

the  individual  and,  6. 
Specialized  capital,  definition  of,  136, 

137. 
Speculation,  function  of,  360,  361. 
Standard  of  deferred  payments.     See 

Money. 
Standard  of  value.     See  Money. 


420 


INDEX 


Standard  Oil  Company,  organization 
of,  187 ;   dissolution  of,  189. 

State  banking,  era  of,  235. 

State  finances,  character  of,  398-400. 

Steadiness,  an  element  in  efficiency,  103. 

Sterling  exchange,  definition  of,  248- 
250.  See  Gold  points.  Par  of  ex- 
change. 

Stock  exchange,  functions  of,  93,  94, 
219. 

Stocks,  kinds  of,  92,  93. 

Strike,  effectiveness  of,  316-319. 

Substitution,  nature  and  extent  of,  78, 
79 ;  influence  of,  on  monopoly  price, 
148,  149. 

Supply,  nature  of,  54,  55.  See  De- 
mand, Price. 

Tariff.     See  Protective  tariff. 

Tariff  legislation,  account  of,  256-261 ; 
basis  of,  261,  262. 

Tax,  definition  of,  400,  401. 

Taxation,  nature  of,  24;  as  an  equal- 
izer of  incomes,  292;  bases  of,  401- 
403 ;   justice  and  expediency  in,  403. 

Taxes,  discussion  of,  397-407. 

Territorial  division  of  labor,  principle 
of,  106-108. 

Thrift,  importance  of,  72-78. 

Time  utility,  definition  of,  21. 

Time  wages,  definition  of,  306,  307. 

Trade.     See  Commerce. 

Trade  acceptances,  nature  of,  244,  245. 

Trade  debts,  payment  of,  243-247.^ 

Trade-marks,  basis  of,  183;  laws  re- 
garding, 185,  186. 

Transportation,  function  of,  21 ;  de- 
velopments in,  87,  154-158. 

Trusts,  characteristics  of,  109 ;  his- 
tory of,  186-188;  opposition  to, 
188,  189 ;   regulation  of,  189,  190. 

Unearned  increment,  definition  of, 
335-338. 


Unemployment,  risks  of,  382,  389; 
socialistic  attitude  toward,  370. 

Union.  See  Organized  labor,  Amer- 
ican Federation  of  Labor,  Closed 
shop.  Closed  union,  Wages. 

United  States  notes  (greenbacks), 
issue  of,  218,  219. 

Urban  land,  application  of  the  law  of 
diminishing  returns  to,  127,  128. 

Urban  rents,  nature  of,  334-338. 

Utility,  definition  of,  20-22.,  See 
Diminishing  utility.  Marginal  utility. 

Utopian  socialism,  leaders  of,  371. 

Value,  relations  of  money  to,  199,  200. 
See  Consumption,  Damand,  Supply. 
Variety  stores,  business  of,  178,  179. 

Wage-earners,  number  in  the  United 
States,  298. 

Wages,  nature  and  character  of,  295- 
308.  See  Labor,  American  Federa- 
tion of  Labor,  Organized  labor. 

Wagon  roads,  influence  of,  155. 

Wants,  nature  of,  32,  33 ;  variation  in 
the  intensity  of,  40;  limitations  on, 
41,  42;  relation  of  social  progress 
to,  42-44. 

Waste,  sin  of,  72;  reasons  for,  118, 
144,   145. 

Water  power,  place  in  industry  of,  120. 

Waterways,  influence  of,  154,  155. 

Wealth,  welfare  and,  9-12;  nature  of, 
10,  11;  distribution  of,  12,  285- 
287 ;  confers  power  on  its  posses- 
sor, 31,  32. 

Wealth  of  Nations,  influence  of,  141; 
extract  from,  142. 

Welfare,  wealth  and,  9-12. 

Wheat,  fixed  price  of,  192,  193. 

Wholesaler.     See  Middleman. 

Women,  in  industry,  305,  306. 

Workmen's  compensation  laws,  extent 
of,  390,  391. 


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1933 


JAN  31  1938 

AUG  15  1941 
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